One of the top-performing companies on the TSX in the last decade is TMX Group (TSX: X). Valued at a market cap of $7.6 billion, the TSX stock is up 233% in dividend-adjusted gains since March 2013. In this period, major indices such as the S&P 500 and TSX have returned 218% and 124%, respectively.
Despite its market-beating gains, TMX Group currently offers investors a dividend yield of 2.6%. Let’s see if X stock can continue to deliver outsized gains to shareholders in 2023 and beyond.
Is TMX stock a buy or a sell?
TMX Group operates exchanges as well as clearing houses for capital markets in Canada and globally. It is a tech-enabled business that is focused on delivering profitable growth. The company has increased its sales from $807 million in 2019 to $1.11 billion in 2022. Despite a challenging macro environment, TMX Group increased sales by 14% year over year in the last 12 months. Further, its adjusted earnings per share rose to $9.69, an increase of 62% year over year.
Due to its widening sales and profit margins, TMX ended 2022 with a free cash flow of $361 million, compared to a free cash flow of $249 million in 2018.
Around 49% of its revenue is recurring in nature, allowing TMX to generate predictable cash flows across market cycles. It also generates 40% of sales from international markets, providing shareholders with regional diversification.
TMX ended 2022 with an operating margin of 47%, showcasing it is an asset-light business and enjoys significant pricing power. The Global Solutions, Insights & Analytics business is the largest segment for TMX, accounting for almost a third of total sales in 2022.
This business provides data for equities and indices for proprietary and third-party analytics, enabling clients to make actionable investment decisions. With more than 274 new listings on the TSX and TSXV exchanges in 2022, TMS is well poised to benefit from the addition of new issuers, which will result in higher trading volumes and higher fees for the company.
What’s next for X stock price and investors?
Analysts tracking TMX stock expect sales to increase by 1.5% to $1.16 billion, indicating it’s priced at 6.5 times forward sales, which is quite steep. But it is also valued at 14 times trailing earnings, which is reasonable.
Going forward, TMX Group aims to grow its revenue and earnings by double-digit rates annually. It has also targeted a payout ratio of between 40% and 50%, providing the company with enough room to increase dividends, reinvest in capital expenditures, and strengthen its balance sheet.
In the last 10 years, its annual dividends have more than doubled from $1.60 per share to $3.48 per share.
TMX is looking to increase the percentage of recurring revenue to 67% of total sales and targets more than 50% of sales via international markets. Its wide economic moat, expanding base of products and solutions, and rising profitability make it a top long-term bet in 2023. Analysts tracking TMX stock remain bullish on the company and expect it to surge over 10% in the next 12 months.
