Dividend Aristocrats In Focus: S&P Global

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Dividend Aristocrats In Focus: S&P Global


Updated on February 17th, 2021 by Bob Ciura

Each year, we publish an in-depth look at each of the Dividend Aristocrats, an exclusive list of stocks in the S&P 500 Index, with 25+ years of consecutive dividend increases. There are just 65 Dividend Aristocrats in the entire S&P 500 Index, which indicates the difficulty in reaching 25 consecutive annual dividend increases.

In order to join the Dividend Aristocrats list, a company must have competitive advantages and the ability to increase its dividend each year, even during recessions. As a result, the Dividend Aristocrats are a good source of dividend growth stocks.

With this in mind, we created a list of all 65 Dividend Aristocrats, with important metrics such as dividend yields and price-to-earnings ratios. You can see the full list of all 65 Dividend Aristocrats by clicking on the link below:

 

Up next in our annual Dividend Aristocrats In Focus series is S&P Global Inc. (SPGI).

S&P Global 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 48 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 46 consecutive years.

This article will take a closer look at S&P Global, and what makes it such a high-quality dividend growth stock.

Business Overview

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, the most widely-recognized index of all large-cap U.S. stocks.

S&P Global offers financial services, including credit ratings, benchmarks, analytics, and data, to the global capital and commodity markets. It derives revenue from four operating segments: Ratings, Market Intelligence, Platts, and S&P Dow Jones Indices. 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 a very strong business model. The company has generated impressive growth rates over the past several years.

Source: Investor Presentation

Today, the S&P 500 is arguably the most widely-known stock market index in the world. The company generates more than $6 billion in annual revenue, with 20,000 employees. The company has a current market cap of more than $65 billion.

S&P Global’s business performed very well during in 2020, even as the coronavirus pandemic sent the U.S. economy into recession. Fourth-quarter revenue increased 8%, while full-year revenue rose 11%. Adjusted earnings-per-share increased 7% for the fourth quarter and 23% for 2020. S&P Global has a long history of growth, even during recessions, and should be able to grow its revenue and earnings-per-share again in 2021.

Growth Prospects

S&P Global has significant catalysts for future growth. Assuming the global economy continues to recover from the coronavirus pandemic in 2021, S&P Global should continue to see greater demand for financial analysis and debt ratings. This is all crucial information for investors.

S&P’s own economists project 5% global GDP growth for 2021. This should lift the broader financial services sector, and S&P Global in particular.

Source: Investor Presentation

As a result, ratings revenue continues to rise at a steady pace, and took only a modest dip during the Great Recession.

The company’s S&P Dow Jones Indices segment generated 8% revenue growth in 2020 along with 5% operating profit growth, primarily due to growth in asset-linked fees. Meanwhile, the Market Intelligence segment posted organic revenue growth of 7% for 2020. Separately, Platts revenue increased 4% for the year, while Ratings segment revenue increased 15%.

For 2021, S&P Global expects to grow revenue in the mid-single digits on a percentage basis. Adjusted EPS is expected to be in the range of $12.25 to $12.45. At the midpoint of guidance, this would imply 5.6% earnings-per-share growth in 2021. Free cash flow is expected to be in a range of $3.3 billion to $3.4 billion. We expect annual earnings-per-share growth of 8% through 2026.

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. Specifically, becoming an accepted rating agency would require a great deal of trust from the financial industry and government that is hard to build quickly, if at all.

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:

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

S&P Global currently trades at ~$339 per share. Using the company’s adjusted earnings-per-share guidance for 2021 of $12.35, the stock has a price-to earnings ratio of 27.4. S&P Global’s 5-year average price-to-earnings ratio is 21, but we’re assessing fair value at 26 times earnings, given the sustained, outstanding performance the company has produced.

Still, shares appear slightly overvalued. If shares were to retreat to a P/E ratio of 26 over the next five years, investors would see a reduction in annual returns of 1.0%. The stock also has a current dividend yield of 0.9%, which will boost shareholder returns. The dividend is highly secure, with a projected 2021 payout ratio of approximately 25% for 2021.

A potential bull-case breakdown of future returns is as follows:

In this scenario, we expect that S&P Global stock would generate a total return of 7.9% per year through 2026. This is a satisfactory rate of return, but it does not quite meet our typical threshold of 10% for a buy rating.

Final Thoughts

S&P Global is a strong business, with a long runway of growth up ahead. There will always be a need for financial ratings services. And, future growth potential is strong in new areas like data and financial technology. S&P Global’s acquisitions will accelerate its growth in these segments.

The dividend yield of 0.9% might not be attractive to income investors, as it trails the S&P 500 average yield of 1.5%, but dividend growth investors should view the stock more favorably. According to the company, it has increased its dividend by 10.2% compounded annually since 1974. On January 27th, S&P Global increased its dividend by 15%.

That said, shares are somewhat expensive relative to the historical average, earning S&P Global stock a hold recommendation at the current price.

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