Until the industry-wide meltdown, investors saw Canadian tech stocks as the best bet to make millionaire-maker returns with stock market investing. At its peak, TSX tech sector stocks boasted soaring valuations and rapid growth through capital gains. Since then, most tech stocks have fallen far from grace and trade at more reasonable valuations.
However, not all TSX tech stocks have a reputation for high volatility and significant risk. Constellation Software (TSX:CSU) is a tech stock that has been around for a while and has delivered significant returns to its shareholders. As of this writing, Constellation Software stock trades for $3,707.87 per share. Up by 20,161.58% since its initial public offering (IPO) in 2006, it has crushed the broader market returns.
If you invested $5,000 during its IPO, your shares of Constellations Software stock would be worth over $1 million right now.
Boasting a $78.58 billion market capitalization, the Toronto-based firm is a diversified software company and among the largest publicly traded companies in the country.
Where many other tech stocks have delivered multi-fold returns to investors and folded under pressure, Constellation Software remains a tried-and-tested millionaire-maker tech stock. Let’s see why this TSX stock can still be a good holding to consider for your self-directed portfolio.
Constellation Software
Constellation Software is in the business of acquiring, managing, and building vertical market software businesses. Acting like a venture capitalist firm, it focuses on profitable software companies that offer mission-critical software solutions to enterprises, addressing requirements for customers across various niche markets.
By acquiring successful companies with high-growth potential, Constellation Software has managed to drive significant growth for itself, boost the businesses under its banner, and grow shareholder value significantly over the years. The company’s business model puts it in a unique position in the tech sector, allowing it to leverage high customer retention rates and stable cash flows across business cycles.
Constellation Software generates revenue through hardware sales and fees from software licenses, professional services, and maintenance services.
Constellation Software in 2023
Between the inflationary environment and aggressive key interest rate hikes to combat it, the economy and businesses across the board struggled in 2023. Despite the challenges the broader market faced, Constellation Software posted a stellar performance in 2023. The company’s year-over-year sales increased by 27%. In the same period, its net income increased by 10%.
Constellation Software also reported a free cash flow of $1.16 billion for 2023, along with a $1.78 billion operating cash flow. The primary reason for its growth was the $2.6 billion in acquisitions the company made.
However, the tech giant’s free cash flow’s 36% rise did not cover the cost of acquisitions and dividends it paid out. Constellation Software raised debt to acquire the capital for these, increasing its total debt to $3.33 billion, up from $1.97 in the year before.
Foolish takeaway
Constellation Software is one of the rare tech stocks that pays its shareholders their dividends. While the stock only boasts a 0.15% dividend yield, Constellation Software stock has increased its payouts for the last 15 years by 11% annually.
Analysts anticipate a 10% increase in its share prices in the next 12 months. While it might not deliver rapid returns through short-term capital gains, it can be an excellent long-term holding for stable growth in your self-directed portfolio.
