Wednesday, January 26, 2011

TMX Group

This is a stock (TSX-X) that I follow but do not own. It is classified as a financial stock and I already have too much in the financial area with my bank and insurance holdings. This stock was created when the Toronto Stock Exchange went public in 2002.

This stock started off with very good dividend increases. The 5 and 7 year growth in dividends is 11% and 23% per year, respectively. However, the average increase during the first few years of dividend payments was 55%. In 2007, the increase was only 15% and then from 2007 to 2009 inclusive, there was no change. There was an increase in the later part of 2010 of just over 5%.

The current yield is good at 4.2%. The reason the yield is so good is that the stock price fell over 50% in 2008 and has not yet recovered. As far as total returns go, I have 5 and 8 years of them as this stock only was issued in 2002. If you had purchased this stock 5 years ago, your return would be nil or very low (under 2% per year), with about 3.5% to 4% per year of the return being dividends. No matter how you look at this stock, the price has not done well over the past 5 years.

If you purchased the stock at a reasonable price within the first couple of years of its existence, you would have made between 15% and 25% per year return. 7% to 9% of this return would have been in dividends. The problem again with this stock is that it peaked in 2007/8 and has never fully recovered.

However, it is not entirely the company’s fault about the total return on this stock. What TMX has done is steadily increased its revenue, cash flow and book value quite nicely over this time period. For example, the revenue has increased over the past 5 and 10 years by 16% and 12.5% per share per year, respectively. The company has been in business before it went public, so I have, for some statistics, figures going back at least 10 years.

Where the growth has not been good is for earnings. I have earnings growth for the last 5 and 9 years. I am using 9 years because the earnings in 1999 were negative. Over the past 9 years, growth was just 2.4% per year. However, 2000 could have just been a very good year after a very bad year. But, even the 5 year growth in earnings at 7% is not that good, but is acceptable.

The Return on Equity is quite good and has always been quite good. For the financial year ending December 2009, the ROE is 18% and for the last 12 months, it is a bit better at 19%. The caution here is that the Leverage Ratio (Asset/Book Value) is quite high with 5 year average of 6.75. This ratio has come down a lot lately and is currently at a more reasonable, but still a bit high, value of 3.83. This company has a lot of debt.

The Liquidity Ratio at the end of 2009 was 1.10 and the current one is even lower at 1.00. At 1.00 is means that the current assets and current liability are the same. The Asset/Liability Ratio is currently at 1.36 and has a 5 year average of 1.41. What you want is for the Liquidity Ratio and the A/L Ratio to be at least 1.50.

Tomorrow, I will look at what my spreadsheet tell about the current stock price and also what analysts say about this stock.

TMX Group operates Canada's two national stock exchanges, Toronto Stock Exchange serving the senior equity market and TSX Venture Exchange serving the public venture equity market, Natural Gas Exchange (NGX), a leading North American exchange for the trading and clearing of natural gas and electricity contracts and Shorcan Brokers Limited, the country's first fixed income interdealer broker. TMX Group also owns The Equicom Group Inc., a leading provider of investor relations and related corporate communication services in Canada. TMX Group has its headquarters in Toronto and maintains offices in Montreal, Calgary and Vancouver. Its web site is here TMX. See my spreadsheet at x.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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