Updated on February 3rd, 2022 by Felix Martinez
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 66 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 66 Dividend Aristocrats, with important metrics such as dividend yields and price-to-earnings ratios. You can see the full list of all 66 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.
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 $100.6 billion.
S&P Global’s business performed very well in 2021, even as the coronavirus pandemic sent the U.S. economy into recession. Third-quarter revenue for 2021 increased 13%, while nine-month revenue rose 11%. Adjusted earnings-per-share increased 75% for the third quarter and 25% for the nine months of 2021.
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 2022.
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 global issuance to decrease by 2% for 2022. This will lower earnings growths for the broader financial services sector and S&P Global in particular.
Source: Investor Presentation
However, rating 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 28% revenue growth in the third quarter for 2021 along with 41% operating profit growth, primarily due to growth in asset-linked fees. Meanwhile, the Market Intelligence segment posted organic revenue growth of 7% for the quarter. Separately, Platts revenue increased 8% for the year, while Ratings segment revenue increased 14% to $1.0 billion in the quarter.
For 2022, S&P Global expects to grow revenue in the low double-digits on a percentage basis. Adjusted EPS is expected to average $14.60 per share. This guidance would imply 7% earnings-per-share growth in 2022. Free cash flow is expected to be in a range of $3.6 billion to $3.7 billion. We expect annual earnings-per-share growth of 8% through 2027.
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:
- 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
Using the company’s adjusted earnings-per-share guidance for 2022 of $14.60 per share, the stock has a price-to-earnings ratio of 28.9. 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 2.6%. The stock also has a current dividend yield of 0.7%, which will boost shareholder returns. The dividend is highly secure, with a projected 2022 payout ratio of approximately 23% for 2022.
A potential bull-case breakdown of future returns is as follows:
- 8% adjusted earnings-per-share growth
- 0.7% dividend yield
- -2.6% multiple reversion
In this scenario, we expect that S&P Global stock would generate a total return of 6.1% per year through 2027. This is a satisfactory rate of return, but it does not quite meet our typical threshold of 10% for a buy rating.
S&P Global is a strong business, with a long runway of growth up ahead. There will always be a need for financial rating 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 0.7% might not be attractive to income investors, as it trails the S&P 500 current yield of 1.3%, 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 2021, 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.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases: