Editor’s note: A previous version of this article included incorrect figures for revenue, gross margin and operating margin. The article has been corrected.
Valued at a market cap of $12 billion, TMX Group (TSX:X) has delivered outsized gains for long-term shareholders. The TSX stock went public in November 2002 and has since returned over 2,000% to shareholders. If we account for dividend reinvestments, cumulative returns are significantly higher at 4,580%.
It means a $1,000 investment in TMX Group stock soon after its IPO (initial public offering) would be worth close to $47,000 today. A similar investment in the S&P 500 Index would be worth around $9,500. While TMX Group has crushed broader market returns, let’s see why it remains a top investment even at the current valuation.
A competitive moat
TMX Group operates exchanges, markets, and clearing houses for capital markets in Canada and other international markets. It has four business segments that include:
- Global Solutions, Insights & Analytics: It delivers equities and index data, as well as integrated data sets, to help clients make trading and investment decisions. These solutions include price discovery and trade execution for European and global wholesale energy markets.
- Capital Formation: The segment operates the Toronto Stock Exchange, a national stock exchange for the equities market. It also includes the TSX Venture Exchange and TSX Trust.
- Derivatives Trading & Clearing: It is a clearing house for options and future contracts.
- Equities and Fixed Income Trading & Clearing: It is engaged in the trading operations of stock exchanges and the clearing and settlement of equities and fixed income transactions.
TMX Group has a diversified set of business segments. It operates exchanges such as the TSX and TSXV, which are the primary platforms for equity trading in Canada. The majority of daily trading volumes come from these exchanges, and TMX has successfully established itself as the premier option for companies looking to go public.
Moreover, the financial services industry is regulated with high entry barriers, which should enable the TMX Group to benefit from an entrenched position. Even if new players enter the market, they will find replicating TMX’s expansive network and significant capital requirements challenging.
Strong profit margins
TMX Group’s net revenue increased from $807 million in 2019 to $1.2 billion in 2023. In the last 12 months, its revenue has risen by 19.5% year over year to $1.3 billion. Similar to other asset-light companies, TMX Group benefits from high operating leverage, allowing it to increase profit margins at a faster pace than sales.
For example, its gross margins have risen from 95.5% in 2019 to 96.7% in the last year. In this period, its EBITDA (earnings before interest, tax, depreciation, and amortization) margin decreased from 58% to 53%, while its operating margin decreased from 47% to 45%.
A key reason for TMX stock’s stellar performance is its revenue and earnings growth. In the past decade, sales have increased by 14.6% annually, while earnings growth was higher at 17.3%.
A growing dividend
Another reason to invest in TMX Group stock is its growing dividend payout. The company pays shareholders an annual dividend of $0.74 per share, translating to a forward yield of 1.7%. Its dividends have more than doubled from $0.32 per share in October 2016.
Priced at 24 times forward earnings, TMX Group remains a top investment choice for Canadian investors right now.
