TFSA Investors: Where to Invest $6,500 This Year

Canadian investors can consider buying undervalued TSX stocks such as Softchoice to benefit from outsized gains.

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The contribution limit for TFSA (Tax-Free Savings Account) investors has increased to $6,500 in 2023 to keep up with inflation. A popular registered account among Canadians, the TFSA can be used to hold a variety of qualified investments across asset classes such as bonds, shares, and exchange-traded funds.

With the selloff surrounding equity markets having dragged valuations of companies across sectors lower, investors can buy undervalued dividend stocks right now and benefit from outsized gains.

One such TSX stock you can buy in April 2023 is Softchoice (TSX:SFTC). Let’s see why.

Is Softchoice stock a TFSA buy right now?

Softchoice designs, implements, and manages multi-vendor IT environments essential to the operations of its base of enterprise clients. Valued at a market cap of $1 billion, SFTC stock is part of a highly fragmented IT solutions market.

The IT solutions in North America already exceeds $1 trillion and is forecast to grow 7% annually through 2025. Softchoice now expects its total addressable market in 2022 to surpass $300 billion, providing it with enough room to expand its top line, given the company ended 2022 with $1.26 billion in sales.

In the last 12 months, Softchoice reported adjusted EBITDA (earnings before interest, tax, depreciation and amortization) of $82 million, indicating a margin of 6.5%. It reported a net income of $22 million in 2022 compared to a loss of $10 million in 2021. Additionally, free cash flow rose 22% to $72 million, allowing the company to pay shareholders annual dividends of $0.44 per share.

Softchoice offers investors a tasty dividend yield of 2.5%, and these payouts have risen by 57% since December 2021. It has enough room to keep raising dividends, as Softchoice has a payout ratio of less than 30%.

What’s next for SFTC stock and investors?

Softchoice has a diversified base of customers, with the commercial segment accounting for 53% of sales, followed by small and medium businesses at 37% and enterprise at 10%. Softchoice explains commercial clients generate between $2 million and $10 million in annual sales, while enterprise customers generate over $10 million in annual sales. Comparatively, SMBs generate less than $2 million in sales each year.

With more than 4,750 customers, Softchoice believes its go-to-market strategies have driven customer engagement rates higher. Around 59% of its revenue is recurring in nature, while its revenue-retention rate stood at 106%. So, in the last 12 months, existing customers increased spending by 6% on average.

Softchoice is quite optimistic about delivering long-term growth, as it has penetrated less than 5% of its target market. There is also a significant opportunity for the company to gain wallet share from existing customers, as companies continue their digital transformation journeys.

Valued at 0.7 times forward sales and 16 times forward earnings, Softchoice is very cheap. Analysts tracking the TSX tech stock expect its earnings to rise by almost 14% annually in the next five years, which should also support higher dividend payouts. SFTC stock went public in May 2021 and is down 15% since its initial public offer. It’s currently trading at a discount of 10%, given the consensus price target.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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