If you’re thinking about where to put $10,000 in your Tax-Free Savings Account (TFSA) for the long run, there’s one Canadian company that looks pretty interesting. That’s Constellation Software (TSX: CSU). This company has a history of doing well financially and has a smart way of growing its business. This could make it a good choice for investors looking for steady returns over time.
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Why Constellation?
Constellation Software is in the business of buying, managing, and growing companies that make specialized software for different industries. The tech stock has a whole bunch of these software businesses in its portfolio, covering all sorts of areas. This variety helps them to be more resilient when the market gets a bit shaky, or the economy slows down in certain sectors. It’s like having your eggs in different baskets.
Looking at its most recent earnings report, which covers the last three months and the full year ending on Dec. 31, 2024, Constellation showed some significant growth. Its revenue for the quarter went up by 16% to US$2.703 billion, compared to US$2.323 billion in the same period the year before. Its net income, which is profit after all expenses, jumped by a whopping 102% to US$285 million, or US$13.44 per share, compared to US$141 million, or US$6.65 per share, in the last three months of 2023. For the entire year, revenue grew by 20% to US$10.066 billion, and their net income increased by 29% to US$731 million, or US$34.48 per share. These are pretty impressive numbers!
More to come
The way Constellation grows is by buying up smaller software companies that focus on specific markets and then bringing them into the fold. In 2024, it completed a bunch of these acquisitions, spending a total of US$1.792 billion, which includes some money it will pay out later depending on how those companies perform. These acquisitions help Constellation expand its revenue and its presence in different markets. It’s like constantly adding new building blocks to the business.
Constellation’s financial health also looks good when you look at its cash flow. The cash generated from operations in 2024 was US$2.196 billion, which is a 23% increase from the year before. The free cash flow they had available to shareholders also rose by 27% to US$1.472 billion. This strong cash generation gives them a lot of flexibility for future growth and for rewarding their shareholders.
Speaking of rewarding shareholders, Constellation declared a quarterly dividend of US$1.00 per share. Importantly for Canadian investors, this dividend has been designated as an eligible dividend for Canadian tax purposes. So, if you hold it in a taxable account, it gets a more favourable tax treatment. The TSX stock’s performance also reflects its strong underlying business. As of writing, Constellation’s stock closed at $4,682.54, with its price having ranged between $3,535.00 and $5,040.00 over the past year. The total value of all the company’s outstanding shares is around $102 billion at writing. That’s a pretty big company!
Bottom line
Investing in Constellation Software through a TFSA has the nice benefit of allowing any growth in the stock’s value, as well as any dividends you receive, to be tax-free. Given the company’s consistent track record of strong performance, its smart strategy of acquiring and growing software businesses, and its healthy cash flows, putting $10,000 Canadian dollars into Constellation within a TFSA could be a really smart move for long-term investors, especially those who are looking for both growth and stability in their investments. It seems like a solid foundation for a long-term portfolio.
