2023-09-11 05:14:26 ET
Summary
- S&P Global is on the verge of becoming a dividend king with consistent sales growth and increasing earnings per share.
- The company operates in diverse segments, providing stability and growth opportunities.
- However, the competitive landscape and high valuation pose risks, making it a hold until the forward P/E ratio reaches 25.
Introduction
As a dividend growth investor, I seek new investment opportunities in income-producing assets. I often add to my existing positions when I find them attractive. I also use market volatility to my advantage by starting new positions to diversify my holdings and increase my dividend income for less capital. In this article, I will discuss S&P Global ( SPGI ), a company I do not own and is on the verge of becoming a dividend king.
The financial sector is intriguing as it contains various industries that are somewhat disconnected from one another. From credit card infrastructure companies like Visa to banks and insurers. We see different performances across segments as they are so different. S&P Global provides data for the financial markets, and it also supports market players from creating the index to rating its components.
I will analyze S&P Global using my methodology for analyzing dividend growth stocks. I am using the same method to make it easier to compare researched companies. I will examine the company's fundamentals, valuation, growth opportunities, and risks. I will then try to determine if it's a good investment.
Seeking Alpha's company overview shows that:
S&P Global provides credit ratings, benchmarks, analytics, and workflow solutions in the global capital, commodity, and automotive markets. It operates through six segments: S&P Global Ratings, S&P Dow Jones Indices, S&P Global Commodity Insights, S&P Global Market Intelligence, S&P Global Mobility, and S&P Global Engineering Solutions. The S&P Global Ratings segment is an independent provider of credit ratings, research, and analytics. The S&P Dow Jones Indices segment is an index provider that maintains various valuation and index benchmarks. The S&P Global Commodity Insights segment provides information and benchmark prices. The S&P Global Market Intelligence segment offers multi-asset-class data and analytics integrated with purpose-built workflow solutions. The S&P Global Mobility segment provides solutions serving the full automotive value chain. The S&P Global Engineering Solutions segment offers engineering standards and knowledge.
Fundamentals
The revenues of S&P Global have increased significantly over the last decade. In ten years, sales are up 160% as the company offers more data and insights to clients. The company grows organically by providing more services to the expanding financial sector, but it also extends through acquisitions, mainly the IHS Markit acquisition in 2022 for $44B. In the future, as seen on Seeking Alpha, the analyst consensus expects S&P Global to keep growing sales at an annual rate of ~7% in the medium term.
The EPS (earnings per share) of S&P Global increased slower during that period. The earnings doubled themselves but declined significantly since 2021. The EPS decline is associated with lower margins following higher expenses, some related to the IHS Markit acquisition and the higher share count as the company financed the purchase with stock. In the future, as seen on Seeking Alpha, the analyst consensus expects S&P Global to keep growing EPS at an annual rate of ~13.5% in the medium term.
The dividend is probably the company's crown jewel. The company has been increasing its dividend for almost five decades. It will announce the March 2024 payment in the coming months, expected to be the 50th annual increase in a row. The dividend payment is likely safe, with the payout ratio below 50% despite the decline in the company's EPS. The only downside is the current yield of 0.9%, which makes it less compelling for income investors.
In addition to dividends, companies, including S&P Global, return capital to shareholders via buybacks. These buybacks support EPS growth as they reduce the number of outstanding shares. Over the last decade, the number of shares increased by 17.5%. The company has acquired shares, yet the acquisition of IHS Markit in an all-stock deal has significantly increased the number of shares. Since the purchase, the company has been buying back shares aggressively to undo the shareholders' dilution.
Valuation
The P/E (price to earnings) ratio of S&P Global, when using the 2023 EPS estimates, stands at 31. This valuation is high, even considering the 13.5% expected growth rate. Investors nowadays can enjoy risk-free returns of 4%-5% depending on the maturity of the treasuries. Therefore, having a 3% EPS yield leaves them with no margin of safety if the company doesn't execute flawlessly.
The graph below from Fast Graphs emphasizes that S&P Global has been overvalued since 2018. The company's average P/E ratio over the last two decades is 22. During that time, that company offered an 11% annual growth rate. Paying 22 times EPS for 11% makes sense during low-interest rate times. However, the P/E ratio is roughly 50% higher, and even the higher growth rate cannot justify it. Therefore, the shares are overvalued when the P/E ratio is above 25.
Opportunities
The first growth opportunity is the company's diversification. The company operates in six segments, with none accounting for more than a third of its sales. This diversification allows investors to spread risk across different business offerings and geographics. For instance, S&P Global's involvement in credit ratings can provide stability during economic downturns. At the same time, everyone seeks havens, while commodity insight can benefit from a positive business environment as investors seek more exposure to commodities.
Another growth opportunity is tech adoption. S&P Global's commitment to technology adoption is one of its critical success factors. The company has been investing in data analytics, artificial intelligence, and blockchain, enhancing its ability to provide cutting-edge solutions to clients. This tech-driven approach improves efficiency and positions S&P Global to meet the evolving demands of the financial industry. The company envisions leveraging AI in its systems to offer even better analysis and insights from its vast databases.
The company's relatively new vertical focuses present attractive investment opportunities. The company concentrates on services such as credit ratings, data analytics, and ESG assessments for the entire market and offers in-depth services that leverage comprehensive datasets. These business areas, such as engineering and mobility, require in-depth analysis and understanding of workflow and business needs. In Q2 2023, the company's mobility business grew the fastest, with a 10% sales increase compared to 4% of the entire business.
Risks
The first risk is competition, which is significant for S&P Global. The financial services industry is highly competitive, with established players and emerging startups vying for market share. This intense competition can pressure pricing and market positioning, potentially impacting S&P Global's profitability and growth prospects . The company deals with highly competitive business environments in every segment, from credit rating, where it competes with Moody's and Fitch, to its vertical businesses. Therefore, the company has to invest and hire top-quality employees constantly.
Another risk is a recession, as an economic downturn may pose a risk to the growth of the business. During financial crises, there can be reduced demand for credit ratings, lower investment activity, and decreased market liquidity. This can negatively affect S&P Global's revenue streams and profitability. The company has decent sales vehicles during downturns, but its slower growth can be hazardous due to its high valuation, which leaves little margin of safety.
The last risk is long-term but may be crucial in adopting technology. While technology adoption is an opportunity, it also comes with risks. Rapid technological advancements can disrupt the financial services industry, affecting the relevance of traditional services like credit ratings. Prominent fintech startups who want to disrupt S&P Global may invest in AI capabilities, which may offer great insights with fewer databases, hindering one of S&P Global's competitive advantages.
Conclusions
To summarize, S&P Global stands out as a premier blue-chip investment that is about to be a dividend king. The company demonstrates a consistent sales growth pattern, translating into a sustained increase in earnings per share. These growing earnings are channeled back to shareholders through buybacks and dividends. Furthermore, S&P Global enjoys numerous avenues for growth domestically and internationally, particularly as it expands its networks and responds to increasing global demand for financial and information services in general and specific verticals.
However, there are various risks tied to this investment thesis. Leading among them is the competitive landscape within the financial and information services sector. While S&P Global is well-positioned to compete effectively, it must navigate ongoing industry competition. The company's current valuation is the primary concern, as it lacks a significant margin of safety. Therefore, the share is a HOLD for me until it reaches a forward P/E ratio of 25.
For further details see:
S&P Global Is A Gem, But A Too Expensive One