S&P Global (SPGI)

S&P Global (SPGI)

Postby winston » Sun Aug 13, 2017 7:30 pm

A Fast-Growing Dividend Aristocrat With a Wide Moat

by Brian Bollinger

A Fast-Growing Dividend Aristocrat With a Wide Moat
by Brian Bollinger, Simply Safe Dividends • August 13, 2017

With 30 consecutive years of dividend increases under its belt, S&P Global (SPGI) is a member of the dividend aristocrats.

S&P Global is one of the most unique companies in this group for a number of reasons, making it an interesting stock to keep an eye on for long-term dividend growth investors.


The company’s business model requires very little capital, generates excellent free cash flow, and enjoys a handful of significant competitive advantages.
While SPGI’s yield is much lower than the payouts offered by some of the best high dividend stocks here, S&P’s double-digit growth potential and large moat can still make this company an interesting consideration for a long-term dividend growth portfolio.

Business Overview
Founded in 1888 in New York City, and formerly known as McGraw Hill Financial, S&P Global’s 20,000 employees provide independent ratings, benchmarks, analytics, and data to the capital and commodity markets in 31 countries under several well known brands including: Standard & Poor’s (S&P), S&P Capital IQ, Platts, and SNL.

Source: SPGI Factsheet

In 2016, S&P Global rated over $3.7 trillion in corporate and government debt, and the company operates in three business segments:

Ratings: provides credit ratings, research and analytics, information, and benchmarks to investors and debt issuers. S&P Ratings has been providing important information for over 150 years to help investors make better decisions and improve companies’ access to capital markets.

Market & Commodity Intelligence Segment: offers multi-asset-class data and research and analytical capabilities. Capital IQ, SNL, Platts, and J.D. Power are included in this segment.

S&P Dow Jones Indices: provides global indices that investment advisors, wealth managers, and institutional investors use to benchmark $11.7 trillion of assets. This segment makes money from exchange traded funds (ETFs), derivatives, and index-related licensing fees (e.g. the S&P and Dow Jones names). It is well positioned to grow from the trend toward passive investing.

The company derives its revenues from a mix of subscription fees, as well as various corporate, insurance, and government clients around the world. You can see that corporations accounted for just over half of the firm’s revenue in 2016.

Source: SPGI Factsheet

In 2016, 58% of the company’s revenues were derived from the U.S.

Business Analysis
S&P Global primarily benefits from its strong brand recognition and the mission-critical nature of its data. After all, participants in financial markets and executives in commercial markets need extremely reliable, accurate, and trustworthy information to make critical business and investment decisions.

The company’s primary brand, Standard & Poor’s, has been around since 1860, establishing long-lasting customer relationships built on trust and quality. McGraw Hill purchased S&P in 1966 and hasn’t looked back.

In addition to hard-to-replicate brands built on reputation and trust, S&P’s business benefits from the U.S. Credit Rating Agency Reform Act of 2006 that requires financial market participants to use nationally recognized statistical rating organizations (NRSROs).

These are the only ratings agencies that the U.S. Securities and Exchange Commission permits other financial companies to depend on for regulatory purposes.

There were only 10 NRSROs today, which limits competition and helps S&P maintain strong market share and profitability.

Registration with the government is very difficult, and new players have no reputation built up, which keeps barriers to entry high for the company’s S&P Ratings segment.

As a result, in its bond rating segment, S&P really only competes with Moody’s (MCO) and Fitch, which collectively enjoy 95% market share in this large and highly lucrative business.

In addition to regulations, this oligopoly is due to the fact that bond ratings, which tell investors the risk that a company or government will default on its debt, are based on highly specialized and copious amounts of data.

For example, S&P’s letter grades for debt are derived from over 100 years of proprietary data and algorithms. This means that, despite the high margins in this industry, it’s almost impossible for an upstart to break into the market and steal significant market share from the entrenched three giants in the industry.

As a result, S&P has limited competitive in this vast and steadily growing market. Take corporate debt, for example, which represents nearly a $10 trillion market.

Source: SPGI Investor Presentation

S&P’s fee for rating debt is typically about 0.1% of the bond offering, which means up to $10 million and $100 million high-margin revenue on a $1 billion corporate bond or $10 billion major sovereign bond issuance, respectively.

This wide moat is even stronger in S&P’s other businesses, because there the company’s high margins are protected by strong network effects generated by its mountains of data, highly trusted analysts, and recurring revenue in the form of subscriptions.

For example, its Markets & Commodities division is largely a subscription-driven business mode, in highly cyclical industries such as oil & gas, mining, and agriculture.

Thanks to the high-quality of its research, S&P offers numerous businesses, commodities and futures traders, and asset managers essential information and prediction models through brands such as S&P IQ and Platts, which have subscription retention rates of 90%.

Recurring subscriptions help smooth out results and continue delivering free cash flow when the company’s transaction-based revenue (e.g. bond issuance) takes a dip.

And as for its S&P Dow Jones Indexes business, the company’s moat is very wide here as well.

That’s because this business unit literally mints money by maintaining, tracking, and licensing the world’s most famous and widely followed market indexes, including the S&P 500 and the Dow Jones Industrial Average.

Even better? S&P licenses the name rights to various popular passive funds, such as the world’s largest exchange traded fund, iShares SPDR S&P 500 ETF, which has $243 billion in assets under management.

Just how lucrative are these deals? Well S&P gets 0.03% of the ETF’s assets under management, which adds up to over over $100 million in operating profits each quarter just from these fees. In fact, thanks to this essentially free money, this business segment is the company’s most profitable with 66% net margins.

Meanwhile, not only is S&P likely to continue to benefit from the shift away from high fee active funds and towards lower cost passive vehicles ($2 trillion in just the last nine years), but its market share among indexed ETFs continues to grow strongly as well, despite its rather steep licensing fee.

When you combine all three of these wide moat, high margin, and steadily growing businesses, you get solid top and bottom line growth over time.

Source: Simply Safe Dividends

And due to the low overhead nature of this industry, S&P has been able to generate strong economies of scale through cost cutting, resulting in not just very strong profitability, but steadily improving margins and returns on shareholder capital.

In fact, over the past 12 months, S&P has managed to generate not just much better profitability than its industry peers, but also the single most profitable dividend aristocrat.

Sources: Morningstar, Gurufocus

Part of the company’s success is driven by management’s actions in recent years to refocus the firm on its strengths in the financial services market.

The company sold its education publishing business in 2013 for $2.4 billion and agreed to sell its J.D. Power business for $1.1 billion in August 2016, for example.

In addition to divestitures, S&P has actively acquired companies that fit its strategy. Most notably, the company acquired SNL Financial for $2.2 billion in 2015.

SNL is a major news and data services provider that serves the financial, real estate, energy, media, and metals & mining sectors. This deal will help S&P offer a more compelling bundle of services to its existing customers.

SNL’s services largely complement the S&P Capital IQ business and widen the reach of S&P’s Platts business in commodities markets. S&P also has plenty of opportunity to expand SNL’s services overseas (over 90% of its revenue was from the Americas at the time of the acquisition).

The company’s solid profitability has allowed it to aggressively return capital to shareholders, not only with 30 straight years of rising payouts, but with steady buybacks to the tune of 3% annually for the last dozen years.

This reduction in share count, combined with increasing economies of scale, is why management believes it can continue to convert mid to high single-digit long-term sales growth into mid-double-digit EPS and FCF per share growth, which bodes well for payout growth potential.

Overall, S&P’s growth should benefit as the company continues expanding and improving a portfolio of mission-critical financial assets that can be cross-sold to existing customers, increase switching costs, generate higher deal values, and scale easily.

However, there are several major risks to be aware of.

Key Risks
S&P faces three main risks going forward.

1. First, its greatest competitive advantage in its largest business segment, debt rating, is dependent on the company’s ongoing credibility and the trust its brand carries in the world of high finance.

2. After decades of heavy borrowing, the Institute of International Finance reports that total global debt/GDP now stands at $217 trillion, or over 325% of GDP.

This means that future borrowing could very well be lower than in recent years, which would mean a substantial decline in S&P’s debt rating revenues as occurred during the Great Recession when bond issuances declined by 22%.

3. Finally, be aware that because S&P’s business is so closely tied with those of financial markets, the company’s rate of its dividend growth is not nearly as steady as some other dividend aristocrats.


SPGI’s forward P/E ratio of 24.6 is much higher than both the forward P/E ratio of the S&P 500 (17.7), its industry peers (19.8), and its own historical norm (15.6).


Source: Simply Safe Dividends

http://dailytradealert.com/2017/08/13/f ... wide-moat/
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