Published by Bob Ciura on October 17th, 2017
Every year, we publish an in-depth look at each of the 51 Dividend Aristocrats, an exclusive list of stocks in the S&P 500 Index, with 25+ years of consecutive dividend increases.
Next in line in our annual series, is S&P Global (SPGI).
S&P Global might fly under the radar of most income investors, but it has a very impressive dividend track record. It has paid a dividend each year since 1937.
And, S&P Global has increased its dividend for 44 years in a row. According to the company, it is one of fewer than 25 companies in the S&P 500, that has increased its dividend for at least 44 consecutive years.
This article will take a closer look at S&P Global, and what makes it such a high-quality dividend growth stock.
S&P Global traces its roots back to 1917, when McGraw Publishing Company and the Hill Publishing Company came together. The company was first named McGraw Hill Financial. In 1957, McGraw Hill introduced the S&P 500.
Today, the S&P 500 is arguably the most widely-known stock market index in the world. The company generates more than $5.6 billion in annual revenue, with over 20,000 employees.
S&P Global has a long track record of growth.
Source: Q2 Earnings Presentation, page 7
The restructuring was based on a strategic initiative, to focus on the global markets. Nearly half the company’s revenue is now generated from outside the U.S.
S&P Global offers financial services, including credit ratings, benchmarks, analytics, and data, to the global capital and commodity markets.
It derives revenue from these three operating segments:
- Ratings (48% of revenue)
- Market and Commodities Intelligence (40% of revenue)
- S&P Dow Jones Indices (12% of revenue)
S&P Global has a highly profitable business model. It is the industry leader in credit ratings and stock market indexes, which provide it with high profit margins and growth opportunities.
S&P Global has significant catalysts for future growth. The global economy continues to expand, which fuels greater demand for financial analysis and debt ratings, which is crucial information for investors.
Ratings revenue continues to rise at a steady pace, and took only a modest dip during the Great Recession.
Source: Q2 Earnings Presentation, page 19
2016 was a very good year for S&P Global. Total revenue increased 7%, and along with cost controls and share repurchases, drove 14% adjusted earnings-per-share growth for the year.
Growth in 2017 and beyond will, in part, be fueled by recent divestitures and acquisitions. The company has sold off low-growth businesses, and reinvested in new areas. Its many divestitures include J.D. Power, the SPSE/CMA pricing businesses, QuantHouse, and equity and fund research.
S&P Global also acquired PIRA and RigData, which helped Platts revenue increase 10% last quarter.
The company is off to a strong start to 2017 as well. Over the first half, total revenue and adjusted earnings-per-share increased 5% and 26%, respectively.
Divestitures and cost cuts have driven significant margin expansion.
Source: Q2 Earnings Presentation, page 8
Ratings revenue increased 10% last quarter, due to higher revenue from corporate bonds, bank loans, and structured products transactions. Ratings revenue increased 9% in the U.S., and 11% in the international markets.
Market and Commodities Intelligence revenue declined by 10%, but this was due to the various divestitures. Excluding lost revenue from divestitures, revenue grew 8%.
Lastly, S&P Dow Jones Indices revenue increased 20% last quarter, due to a 24% increase in asset-linked fees. This primarily includes revenue from exchange-traded funds. Assets under management associated with S&P Global’s indexes rose 34% for the quarter.
For the full year, management expects adjusted earnings-per-share in a range of $6.15 to $6.30. At the midpoint, earnings would increase 16%.
Competitive Advantages & Recession Performance
S&P Global enjoys multiple competitive advantages. First, it operates in a highly concentrated industry. It is one of only three major credit ratings agencies in the U.S., along with Moody’s (MCO) and Fitch Ratings.
Put together, these three companies control over 90% of the global financial debt rating industry, with S&P Global on top. And, there are high barriers to entry. Clients pay S&P Global hefty sums for investment research, as S&P Global has built a strong reputation over its many decades of business.
These competitive advantages helped the company remain consistently profitable throughout the Great Recession:
- 2007 earnings-per-share of $2.94
- 2008 earnings-per-share of $2.51 (15% decline)
- 2009 earnings-per-share of $2.33 (7% decline)
- 2010 earnings-per-share of $2.65 (14% increase)
S&P Global’s earnings declined in 2008 and 2009, as investors should expect the company to struggle during recessions. A global recession will naturally result in lower demand for financial services, as investors exit the markets.
That said, S&P Global quickly bounced back after the recession ended. By 2011, earnings-per-share had hit a new post-recession high.
Valuation & Expected Returns
In the past four reported quarters, S&P Global generated adjusted earnings-per-share of $6.04. As a result, the stock has a trailing price-to-earnings ratio of 26.9. This is a high price-to-earnings ratio—the S&P 500 Index has a price-to-earnings ratio of 25.5.
At over 25 times earnings, S&P Global is valued at a premium. It is a high-quality company, but even with its strong earnings growth, investors cannot rely on further expansion of the price-to-earnings ratio to fuel future returns.
As a result, future returns will likely be generated from earnings growth and dividends. Fortunately, the company is growing at a high enough rate, that it can still generate satisfactory returns.
Share buybacks and dividends are a significant driver of investor returns.
Source: Q2 Earnings Presentation, page 10
A potential bull-case breakdown of future returns is as follows:
- 6%-8% organic revenue growth
- 1% margin expansion
- 2%-3% share repurchases
- 1% dividend yield
With expectations of 9%-12% earnings growth per year, total returns would reach 10%-13% annually, including dividends. Note that these returns are before valuation multiple changes, which could negatively impact returns.
The dividend yield does not account for a large portion of total returns, as the current yield is just 1%. This is about half the average dividend yield in the S&P 500.
S&P Global is a strong business, with a long runway of growth up ahead.
A dividend yield of 1% is fairly low, and could be unattractive for retirees looking for higher levels of income. From this perspective, high-yield investors will likely look elsewhere.
However, S&P Global has increased its regular dividend by 10% per year, over the past 5 years. And, it distributed a special dividend of $2.50 in 2012.
As a result, dividend growth investors might take a more favorable view of the stock