Investing in Standard & Poor's ( the company) has been a better investment than Standard & Poor's 500 (the index) over the past quarter of a century ( when the SPY ETF started trading).
S&P Global has managed to grow dividends at an annualized rate of 8.60%/year over the past decade.
The growth in dividends was supported by earnings growth as well. S&P Global has managed to almost double its earnings per share from $2.94 in 2007 to $7.73 in 2018. The growth didn’t occur linearly of course – for the first six years S&P Global earned less than it did in 2007 as it was feeling the aftershocks of the financial crisis, and was in restructuring mode. The company is expecting to earn between $9.06/share in 2019.
S&P Global is a leader in the market for credit ratings. Anyone who wants to sell debt, will have to pay for a credit evaluation from one of those two industry leaders ( with Fitch being third largest). Moody’s & Standard & Poors are essentially a duopoly, which charges a toll for anyone who wants to access credit markets. Both companies have a strong competitive position. The company also earns fees for evaluating and monitoring credit ratings for customers, providing research and delivering ratings on a fee based model. As a result, close to half of revenues are dependent on the growth of credit issuance worldwide. In the long run, credit will likely increase over time. However, there is also the risk that low interest rates have caused a peak in credit issuance. Revenues could go down if interest rates increase and the pace of credit issuance slows down as a result.
I like that S&P Global has a strong line-up of widely followed indices, which can generate a lot of fees in the future, especially as everyone around seems to be becoming an index investor. Those fees are also generated on derivatives on those widely popular indices as well. This segment accounts for roughly 20% of profits.
A third segment accounting for 15% of profits is the Market Intelligence one. It offers data feeds ,research, risk management, data management solutions etc. This is a highly competitive market with a lot of entrants. However, the S&P Global name does have a cache.
The last segment is Platts, which provides information for commodity and energy markets. Revenue is generated from subscriptions and licensing for derivative trading. When I was involved in the energy sector, a subscription to plats was considered to be the gold standard for data and analytics, because of its comprehensive coverage across commodity markets. It is difficult to substitute a vendor for specialized commodity information for example, especially in a professional setting such as within an oil company or a refinery.
S&P Global has also managed to repurchase a substantial portion of shares outstanding by doing regular share buybacks. The company had almost 345 million shares outstanding in 2007 and managed to bring this figure down to 253 million in 2018.
The dividend payout ratio increased between 2007 and 2011, from 28% to 50%. This was due to dividend streak continuing amidst a decline in earnings per share following the financial crisis. Since 2011 the dividend payout ratio has been on the decline and falling back to 26% in 2018. A lower payout ratio is a plus, because it provides an adequate margin of safety to reduce the risk of dividend cuts during the next recession.
Currently, the stock is overpriced at 22 times forward earnings and yields 1.15%. I would be interested in adding to S&P Global if it dips below 20 times earnings. S&P Global was very close to hitting this entry price in late December, but unfortunately it bounced back quickly by the time I got enough funds and did my research to add to my position. I would continue to monitor it, and take advantage of any weakness.
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