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Dividend Aristocrats in Focus Part 16: S&P Global Inc (SPGI)

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S&P Global (SPGI), formerly known as McGraw Hill Financial, has a new name but its business remains the same as it ever was.

McGraw-Hill began in 1917 when McGraw Publishing Company and the Hill Publishing Company combined. Then, in 1957, the company introduced the S&P 500.

Today, the S&P 500 is arguably the most frequently referenced stock market index in the world. Overall, S&P Global generates more than $5 billion in annual revenue. It employs more than 20,000 people across 31 countries.

S&P Global has outperformed the index it popularized over the last decade, as the image below shows.


SPGI has paid a dividend since 1937, and has raised its dividend for the past 43 consecutive years.  This makes the company a member of the exclusive Dividend Aristocrats Index.  To be a Dividend Aristocrat, a stock must:

  1. Be a member of the S&P 500
  2. Have 25+ years of consecutive dividend increases
  3. Meet certain minimum size and liquidity requirements

The Dividend Aristocrats Index includes many of the highest quality stocks in the world.  You can see a list of all 50 Dividend Aristocrats here.

Keep reading this article to learn more about the investment prospects of Dividend Aristocrat S&P Global.

S&P Global Inc (SPGI) – Business Overview

S&P Global was formed after The McGraw-Hill Companies completed the $2.4 billion sale of the McGraw-Hill Education business to Apollo Global Management. McGraw Hill Financial then changed its name to S&P Global.

The strategy for this transformation is to allow the company to focus on the global markets. The name change is designed to place proper focus on the core brand.

S&P Global is a financial services firm that provides ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. S&P Global has relied on its transparency and independence to build its business and reputation in the industry.

The Company’s operating segments include S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices and S&P Global Platts. Its revenue breakdown across operating segments is as follows:

  • 46% S&P Global Ratings
  • 28% S&P Global Market Intelligence
  • 10% S&P Dow Jones Indices
  • 16% S&P Global Platts

It is a global company, with approximately 40% of its annual revenue generated outside the U.S.

S&P Global Inc (SPGI)

Source: 2015 Annual Report, page 8

The business model is very strong. Earnings are growing at a high rate, thanks to SPGI’s high profit margins. In addition, the growing need for comprehensive, impartial financial analysis and debt ratings has fueled significant revenue growth over the past several years.

S&P Global Inc (SPGI)

Source: 2015 Annual Report, page 2

Growth Prospects

S&P Global performs especially well when the economy is expanding, because economic growth typically leads to higher incomes and rising financial markets. This compels more individuals to desire investment research and credit ratings.

Because of this, SPGI’s adjusted earnings-per-share rose 14% last year. It generated a 38.7% adjusted operating margin in 2015, which was a 280-basis point expansion from the prior year.

Its performance to start 2016 is also impressive. Revenue and diluted earnings-per-share rose 8% and 7%, respectively, over the first six months of the year.

S&P Global saw broad-based growth to start the year, but its highest growth rates are coming from the Global Market Intelligence and Global Platts businesses. These two segments grew revenue by 29% and 9%, respectively, due mostly to acquisitions.

SPGI acquired SNL in the Global Market Intelligence business, and NADA Used Car Guide, Petromedia, and RigData in the Global Platts segment.

In addition to revenue growth through acquisition, the company can generate earnings-per-share growth from cost cuts and share repurchases. For example, S&P Global expects to produce $140 million of cost savings by the end of 2016. And, it utilized $1 billion to repurchase its own shares last year.

Competitive Advantages & Recession Performance

SPGI operates in a highly concentrated industry. It is one of only three major ratings agencies in the U.S., along with Moody’s (MCO) and Fitch Ratings.  Cumulatively, these three companies control about 95% of the global financial debt rating industry.  This industry is an oligopoly, in which there are only a few companies that dominate the market.

One of the benefits of operating in an oligopoly is high profit margins. This in itself is a competitive advantage, since there are high barriers of entry that should secure S&P Global’s position in the industry. For example, the S&P Dow Jones segment has generated operating margins over 50% for the past five years.

There’s no question that S&P Global has a strong and durable competitive advantages.

Such high margins helped the company remain consistently profitable throughout the Great Recession.

  • 2007 Earnings-per-share of $2.94
  • 2008 Earnings-per-share of $2.51
  • 2009 Earnings-per-share of $2.33
  • 2010 Earnings-per-share of $2.65
  • 2011 Earnings-per-share of $3.00

And, S&P Global was quick to bounce back from the recession. After its earnings-per-share fell 21% from 2007-2009, earnings-per-share recovered the next two years to set a new high by 2011.

Valuation & Expected Total Returns

S&P Global is a highly profitable company with strong growth rates. The unfortunate side of this is that investors have to pay a premium to buy the stock. As the old saying goes, premium companies often command premium valuations, and this is the case when it comes to the stock.

SPGI currently trades for a price-to-earnings ratio of 28.5. By comparison, the S&P 500 Index has an average price-to-earnings ratio of 24.7.

S&P Global is also valued above its own average multiple in recent years. Since 2013, the stock held an average price-to-earnings ratio of 22.5.

As a result, it is reasonable to doubt whether the stock will experience further expansion in the valuation multiple. Therefore, investor returns moving forward may be comprised of earnings-per-share growth and its dividends.

The good news is that the company is growing at high enough rates that it can still generate satisfactory returns under this scenario. I am assuming 7%-9% earnings-per-share growth each year, which is a fair expectation given its historical growth.

In addition to its 1.2% dividend yield, S&P Global could provide double-digit annualized returns going forward.

Final Thoughts

SPGI stock has a current dividend yield of 1.2%. This may not look very attractive, as it is well below the 2% average dividend yield in the S&P 500 Index.

S&P Global helps make up for this with high dividend growth rates. For example, in 2016 the company raised its dividend by 9%. According to the company, at that time its trailing annual dividend growth rate was 9.5% per year since 1974.

As a result, S&P Global may not be an attractive stock for value or income investors. That being said, it does make an appealing hold for dividend growth investors who have a longer investing time horizon.  But, now is not the time to add to or start a position in this high quality business.

Article by Bob Ciura


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