2023-11-03 13:00:28 ET
Summary
- S&P Global is a top pick for long-term investment due to its strong performance, recent dip in stock price, and high-quality services.
- The company operates in five main business segments, including credit ratings, market intelligence, commodity insights, mobility, and indices, all of which have shown growth in Q3.
- SPGI has a 50-year track record of annual dividend increases and is expected to continue growing its dividend at a double digit pace.
These days, just about every time that I find some cash lying around in one of my brokerage accounts, I buy more shares of S&P Global Inc. ( SPGI ).
That's especially the case after the stock's recent dip.
Back in the summer, SPGI made new highs of $428/share.
In recent months, shares fell approximately 20% down to the $340 level.
To me, that was a great buying opportunity.
Blue chips like this rarely go on sale and whenever they do, I want to make sure that I'm taking advantage of it.
I firmly believe that investors who buy the best companies in the world when they're trading at fair (or better) valuations and hold them over the long term are setting themselves up for massive outperformance.
And to me, when it comes to quality, it doesn't get much (if any) better than SPGI.
Yes, companies like Apple Inc. ( AAPL ) and Microsoft Corporation ( MSFT ) would beg to differ.
Without a doubt, these are wonderful companies and they have strong points to make.
But, I wouldn't be surprised if SPGI outperformed both of them over the long term.
Why?
Well, because the services that S&P Global offers are required for the financial work to go around.
What's more, this company developed a monopolistic moat over the years with very few viable competitors.
And from a dividend growth perspective, I think that SPGI is the clear winner here with a starting yield north of 1% (which beats out the present day yields on AAPL and MSFT of 0.57% and 0.91%, respectively) and dividend growth prospects in the 15%+ range.
Simply put, SPGI stock checks all of the boxes that I'm looking for in a long-term investment.
To me, this is a company that is far too often overlooked by investors. Whether you're looking for growth…or dividend growth, S&P Global has you covered.
Today the stock popped 6.98% after reporting third quarter results.
And therefore, I wanted to put a spotlight on the company after its recent earnings report to discuss why, even after its recent rally, this stock remains at the top of my shopping list.
Q3 Results
During Q3, SPGI beat Wall Street's expectations on both the top and bottom lines.
Its quarterly revenue came in at $3.08 billion, which beat estimates by $50 million, and represented 7.7% year-over-year growth.
SPGI's adjusted EPS was $3.21, which beat estimates by $0.17, representing 10% y/y growth.
S&P Global is best known for its credit ratings, but this isn't just a ratings agency.
Actually, over the years this company has adapted and evolved to the point where it operates 5 main business segments underneath the S&P Global umbrella.
Stand alone, these are all wonderful companies.
The fact that you get access to all 5 by simply buying SPGI shares is why I'm so bullish.
I love this company's diversified revenue stream. During the third quarter, each of these segments posted sales growth.
S&P Global's largest segment actually isn't its bond rating agency, but instead, Market Intelligence (accounting for approximately 35% of Q3 revenues).
This segment includes products such as S&P Capital IQ, which provides financial data to customers ranging from companies' fundamental results to operational metrics, ESG scoring, and balance sheet health.
Everyone from big investment banks, venture capital firms, universities, governments, professional investors…and even individual investors use this data on a daily basis to make informed financial decisions.
Big data makes the world go around these days and S&P Global is the largest business when it comes to hosting financial data.
In the financial space, it's not just about a lot of data…it's about trusted data.
When billion (and even trillion) dollar decisions are being made there is no room for error.
S&P Global will literally pay you money if you can find mistakes or errors in their data sets.
They know that quality and trust are key to their brand equity and they've done a great job of maintaining leadership with stringent data stewardship.
Despite its brand being tarnished by the Great Recession, S&P Global has restored faith in its operations over the years and now maintains an enviable market share position in an industry with incredibly high barriers to entry.
The company has been able to package all of this trusted data into services that generate reliably, high margins, recurring revenue, and high growth…which is why SPGI shares trade with such a high multiple.
During Q3, SPGI's Market Intelligence unit posted $1.1 billion of sales, up 8% on a y/y basis.
The company's Ratings segment is its second largest business (accounting for approximately 26% of Q3 revenues).
This segment generated $819 million during Q3, up 20% on a y/y basis.
The company noted that global debt issuance increased by 21% on a y/y basis during Q3.
This is such a great business because SPGI is a part of a 3-pronged oligopoly with Moody's and Fitch…these 3 companies' ratings account for roughly 95% of global credit ratings.
Because of this status, these companies have strong pricing power.
I remember hearing Warren Buffett talking about why he owns SPGI competitor, Moody's Corporation ( MCO ) a couple of years ago. He said that this pricing power was key to his bullish thesis.
Buffett noted that Berkshire has to pay a lot of money to Moody's for credit ratings.
Frankly, he wishes that they didn't have to.
But, he also noted that business wouldn't be possible without these ratings and he's basically at the mercy of MCO.
"As a practical matter, we need their ratings," he said on Fox Business (even though he said he didn't think Berkshire should need ratings because of its own brand equity).
But, they do. So, instead of being sour about the business relationship, he bought MCO shares for Berkshire's portfolio in a sort of, if you can't beat them, join them maneuver.
Well, as great as Moody's is…I think SPGI is better (it's larger, more diversified, and trades with a cheaper valuation).
S&P Global benefits from the same pricing power metrics as Moody's.
This is a high margin, monopolistic business. Companies with ratings from S&P Global can save a few basis points on their debt…which can save millions (or even billions) when making large offerings.
Because of this reality, even if an upstart ratings agency offered their services for free to a company looking to raise capital, it would still make more sense for them to pay for SPGI's rating because of these savings.
When you can charge top dollar for something and still beat out competitors with lower prices (or even those theoretically offering freebies) then you know you're operating a wonderful business.
This segment is sensitive to macroeconomic conditions in the near term; however, over long periods of time the amount of global debt is always increasing and I don't expect to see this trend change anytime soon.
Therefore, I think SPGI's Rating segment has plenty of growth runway ahead of it…and when you combine strong growth with high margins…well, you arrive at a sleep well at night type of investment.
Commodity Insights is SPGI's third largest segment. This business was responsible for $479 million of its Q3 revenues (accounting for 15.5% of the company's total).
This segment posted 11% growth during the quarter and is fairly similar to the Market Intelligence business…just focused on commodity pricing/data as opposed to company data.
SPGI collects, organizes, and sells this data via subscription plans or licensing deals.
And once again, we're talking about a high margin business that generates predictable cash flows.
This predictability is important to put a spotlight on here.
Even though the price action of things like crude oil, natural gas, or soybeans can be very volatile…selling the data that allows analysts, investors, or companies to make informed decisions is not.
Regardless of market conditions, SPGI's customers need that data to run their businesses and therefore, we're talking about another high quality stream of recurring revenue here.
This is yet another example of SPGI being indispensable for its customers.
Up next, we have S&P Global Mobility (accounting for approximately 12% of Q3 revenues).
This segment generated $379 million during Q3, up 10% y/y.
This segment focuses on cars/automobiles…once again, focusing on selling data.
Their data encompasses industry trends, production, marketing, sales, and aftermarket industries.
Basically, from the start to the finish of the supply chain, SPGI offers data that keeps companies efficient in this ~$3 trillion industry.
The company notes that its services are used by 95% of tier-1 suppliers, as well as media agencies, insurance companies, governments, and investment funds who own car companies.
This is a large (and growing) industry and while I would never be interested in owning a car company (due to poor margins and economic sensitivity) I am more than happy to own SPGI because of the reliable cash flows generated by the Mobility segment data.
Lastly, we have the Indices segment (accounting for 11.5% of Q3 revenues).
This is the smallest segment, but the one with the highest margins.
SPGI's Indices segment posted $354 million in sales (up 6% y/y) and 69.4% operating margins.
S&P Global creates market indexes and then collects fees when people use them, use the data from the indexes, and even sometimes benchmark against them.
SPGI is one of the largest indexing businesses in the world…probably best known for its S&P 500 index (the gold standard for US stocks).
But, they also offer indexes that cover US equities, Global Equities, Developed Equities, Developing Equities, Frontier Equities, and New Economies.
They offer thematic indices, such as the several of the dividend lists that I'm sure so many of you know and love.
And, they also offer fixed income indices covering government, municipal, corporate, and inflation-linked bonds.
You name it, and S&P Global has an index for it.
In short, this company is a great way to play the rise of the passive investing trend that we've seen grow over the years…but with a more asset-light model compared to a company like BlackRock, Inc. ( BLK ) which invests heavily across numerous asset classes.
The closest competitor here, in my opinion, is MSCI Inc. ( MSCI ) which is another wonderful high-growth stock. However, once again, SPGI is more diversified and trades with a cheaper premium.
As the size of the passive investment AUMs that are connected to the indices that SPGI owns rise (which they undoubtedly will) this company is able to sit back and collect more fees.
This is a wonderful business model. It's akin to being a toll booth for the global investing world…with long-term tailwinds.
Not only did SPGI show growth across all of its operating segments, but it raised full-year guidance for sales and earnings, pointing towards bullish expectations for Q4.
S&P Global is now calling for full-year sales growth of 4.5%-5.5% and adjusted EPS to arrive somewhere in the range between $12.50-$12.60 (up from $12.35-$12.55).
The company raised its full-year growth outlook for 4 out of its 5 operating segments (only Indices was unchanged).
All of this growth isn't just a one-time thing.
SPGI has built a very durable business. The company has grown its EPS during 16 out of the last 20 years.
This company is a free cash flow printing machine.
SPGI Free Cash Flow (MacroTrends )
In 2013, SPGI generated roughly $600 million of FCF. In 2021, that figure crossed up above the $3.5 billion range.
Their FCF total fell in 2022 to the $2.5 billion range. But, that's a short-term issue, largely related to economic uncertainty and a lack of debt issuance.
This year the company is on pace to hit a record high FCF figure. During the Q3 report, management noted that they expect to see FCF come in at $4.2-$4.3 billion.
All of this FCF comes alongside relatively low capital expenditures.
Throughout the last decade, SPGI has spent around $100-$150 million on annual capex.
Outside of a few poor years coming out of the Great Recession, S&P Global has made a habit of generating gross margins in the 50-60% range.
Its operating margin has been trending up nicely over the last two decades (as have its profit margins).
I love low overhead businesses like this. Asset light FCF compounders generate reliable profits and this leads to reliably increasing shareholder returns.
The Dividend
With that being said, let's transition away from how great of a business this is to how great they've treated their shareholders over the years.
SPGI is a Dividend King. The company is on a 50-year annual dividend increase streak.
And yet, after all of these raises, their yield is still low at just 1.02%.
You may be wondering, "How did this happen?"
"How could a company that's been raising its dividend for so long have such a low yield?"
Well, the answer is simple: outstanding capital gains.
SPGI shares are up by 392% during the last decade.
They've more than doubled during the past 5 years, up 105%.
The share price has been rising at such a fast rate that the dividend growth can't keep up.
And that's saying something since SPGI's 5-year dividend growth rate is 13.20%.
SPGI's most recent dividend increase came in January of 2023 at just 5.9%.
Remember, 2022 was a down year as far as free cash flow goes and being that this is expected to be a record year, I expect to see the company provide a much larger raise in 2024.
Right now the consensus analyst estimates for SPGI's EPS growth in 2024 and 2025 are 15% and 14%, respectively.
After all of these years of dividend growth, SPGI's EPS payout ratio remains very low at just 29%.
This shows that SPGI's bottom line has consistently compounded over the years (alongside the dividend).
Throughout the last 20 years, SPGI's payout ratio has typically hovered between 25% and 35%.
Right now, we're smack dab in the middle of the range that management appears to feel comfortable.
With that in mind, I expect to see SPGI's dividend grow at a rate that is in line with earnings.
And being that we're looking at ~15% EPS growth prospects over the next couple of years, I expect to see ~15% dividend growth as well.
With the rule of 72 in mind, we see that at that rate, SPGI's dividend will double every 4.8 years.
That means in 10 years, if SPGI is able to keep up 15% annual growth, someone who buys shares today at a 1% yield will have a yield on cost of 4%.
Looking backwards, we see that someone who bought shares 10 years ago would have a yield on cost of 6.5%.
In another 10 years (assuming 15% dividend growth moving forward), this same person would have a yield on cost of ~26%.
This just goes to show that buying and holding blue chip dividend growers like this is a great way to get rich in the stock market.
Valuation
So, we've established that S&P Global is a very high quality compounder that pays a rapidly growing dividend…the final question is, what's fair value for a stock like this?
To me, the answer here is ~25-28x earnings.
Because of SPGI's very high quality and predictable cash flows I'm even willing to place these multiples on forward earnings.
Yes, this is a relatively high premium.
Right now the S&P 500 trades roughly 18x forward earnings estimates.
Therefore, the multiples that I'm happy to pay for SPGI represent a premium range of 40%-55%.
But I think that's justified when looking at relative fundamentals here.
The S&P 500 is currently expected to post earnings growth of 11.9% in 2024.
Honestly, I think that's a bit high and my personal estimate is in the 8-10% range.
Well, I think SPGI will grow its earnings by ~15% next year…meaning that their growth rate is 50% higher than my expectation for the broader market (in line with my proposed valuation premium).
Furthermore, these 25-28x multiples that I'm happy to pay for SPGI line up with the stock's historical averages.
During the last 5 years, SPGI's average P/E multiple is 28.3x.
During the past 10 years, SPGI's average P/E ratio is 24.6%.
As you can see above, even after the stock's 6.98% post-earnings pop today, SPGI still trades below the upper end of my range when looking at 2024 estimates.
Is the margin of safety wide here?
Of course not.
But, when we're talking about a company that is compounding its cash flows and dividend as rapidly as SPGI is…it doesn't matter.
Simply paying fair value, sitting back, reinvesting the dividend, and holding over the long term is a simple enough way to get rich when we're talking about blue chips like this.
My neighbor retired from S&P Global and its shares make up a large portion of his retirement portfolio.
He couldn't be happier about that. Ask anyone who's owned this stock for years how they feel about it and you'll hear glowing reviews.
Conclusion
And this is why I can honestly say that if I were forced to only buy shares of one company for the rest of my life, SPGI would be at the top of my list.
Admittedly, when I started writing this article yesterday, I didn't expect to see a 7% rally this morning.
I thought I'd be able to highlight a best-in-breed company here trading with an attractive valuation attached to it.
But, even after the rally, I think it makes a lot of sense to put a spotlight on S&P Global's earnings and strong full-year expectations.
This is a cash flow machine that should be in the forefront of more investors' minds.
Without a doubt, SPGI is one of the highest quality dividend growers in the entire market.
I sleep well at night with SPGI shares in my portfolio and over time, I hope to add a lot more.
For further details see:
S&P Global: My Favorite Stock In The Market Today