Bullish on stocks? Go right to the heart of the market

If the stock market continues its growth, one company to benefit will undoubtedly be the ASX itself.

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ASX (ASX: ASX) operates Australia's primary national securities exchanges. These include the provision of securities exchange services, derivatives exchange services, central counterparty clearing services, registry, settlement, and delivery-versus-payment clearing financial products, as well as associated ancillary services. It also provides market data services and investor education courses.

ASX is a strong cash-flow generator given its dominant operating position. With relatively low capital expenditure, ASX has been able to sustain a high dividend payout ratio of around 90%. It can reasonably be expected that this will continue well into the foreseeable future.

The company seeks to drive growth organically through product innovation and cost efficiencies. Last calendar year earnings were impacted by lower revenues resulting from reduced market activity. If and when activities pick up, there will be commensurate increases in revenue and profits. Thus, in a general sense, ASX is a barometer of market performance.

ASX carries no debt, although in the past a modest amount was on the books. Currently earnings per share are 196.6 cents as of the 30 June. Projected earnings per share for year ending 30 June 2014 are 197.9 cents; and the amount for the corresponding 2015 year are 212.3. Therefore, price-to-earnings ratios for the next two years are 18.7 and 17.5, respectively. However, if there is a large increase in corporate activity, such as initial public offerings, we could see significantly lower price-to-earnings ratios.

Average annual shareholder returns over the last 10 years have been 14.7%; over the last five years they have been 9.9% and taken for the last three years, they have averaged 5.4. Therefore, as measured over the longest term, returns have been excellent for shareholders.

From a peak of $60.05 late 2007 to a trough in early 2009 of $23.15, ASX is currently trading at $37.10. In the short term, one could say that it reflects market sentiment but, in the long term, it generates revenue and profit according to market activity.

Foolish takeaway

ASX is a relatively safe way to invest in the stock market. At current price the dividend yield is a respectable 4.7%. With capital growth added to a steady and growing dividend stream, ASX offers reasonable reward for the long-term investor.

Motley Fool contributor Chris Koenig does not own shares in ASX.

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