Investing in quality stocks that enjoy high profit margins is a good strategy to beat the broader indices over time. Generally, companies with steep profit margins have the flexibility to invest in growth, target acquisitions, and strengthen the balance sheet, all of which should enhance long-term shareholder value.
Here are three such highly profitable TSX stocks to buy in September 2024.
Onex stock
Valued at $6.75 billion by market cap, Onex (TSX: ONEX) is a private equity company specializing in acquisitions. It invests in companies seeking recapitalization, growth capital, and buyouts. These companies generally offer mission-critical solutions to businesses, resulting in strong customer engagement and high switching costs.
Onex invests in companies in various sectors, including technology, electronics manufacturing, industrial, aerospace, healthcare, retail, restaurants, industrial products, and real estate. These businesses are either headquartered in North America or Europe, where Onex invests anywhere between $125 million and $1 billion.
In the last 10 years, Onex has reported an average operating margin of 36.3%. However, the TSX stock has trailed the broader markets in this period, returning less than 50%, even if we adjust for dividend reinvestments.
ONEX stock is cheap, priced at eight times trailing earnings, and trading at a 35% discount to consensus price target estimates.
TMX Group
Valued at a market cap of $11.9 billion, TMX Group (TSX: X) operates exchanges, markets, and clearinghouses for capital markets in Canada and internationally. With an average 10-year operating margin of over 56%, TMX Group has returned more than 400% to shareholders after adjusting for dividends in the last 10 years.
The company pays shareholders an annual dividend of $0.74 per share, indicating a yield of 1.7%. Moreover, these payouts have risen by 9% annually in the last ten years. With a payout ratio of less than 50%, TMX Group has room to raise these dividends and enhance the effective yield further.
Despite its outsized gains, TMX stock trades at a forward earnings multiple of 26.4 times, which is not too expensive given its five-year earnings growth forecast is around 11.7%.
Canadian Pacific Kansas City stock
The final TSX stock on my list is blue-chip giant Canadian Pacific Kansas City (TSX: CP), which owns and operates a transcontinental freight railway in Canada and the United States. It transports bulk commodities, including grain, coal, potash, fertilizers, chemicals, metals, automotive and forest products. The company also transports intermodal traffic consisting of retail goods in overseas containers.
With a market cap of $105 billion, Canadian Pacific is among the largest companies on the TSX. With an average operating margin of 42%, it has returned close to 175% to shareholders in the past decade. In addition to capital gains, it pays shareholders an annual dividend of $0.76 per share, indicating a forward yield of 0.70%.
In the June quarter, Canadian Pacific Kansas reported revenue of $3.8 billion, an increase of 8% year over year. Its adjusted earnings per share stood at $1.05, 27% higher than the year-ago period. Meanwhile, adjusted EBITDA rose close to 20% to $1.86 billion in the second quarter.
Priced at 26 times forward earnings, CP stock trades at an 11% discount to consensus price target estimates.
