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S&P Global: Great Business, Wait for a Better Price

S&P Global: Great Business, Wait for a Better Price

By Wednesday, 09 September 2020 05:49 PM Current | Bio | Archive

Long-term dividend growth investors typically turn to the Dividend Aristocrats for investment ideas, and for good reason.

The Dividend Aristocrats have each increased their dividends for over 25 consecutive years. As a whole, the Dividend Aristocrats have generated total returns on par with the broader S&P 500 Index in the past 10 years, with far less volatility.

But not all Dividend Aristocrats are automatic buys. Any stock can be a poor investment, even a Dividend Aristocrat, if the investor pays too high a price. We believe this is the case with S&P Global (SPGI), a Dividend Aristocrat with over 40 years of consecutive dividend increases. While the company has an impressive dividend history which has made it a favorite among institutional investors such as Valley Forge Capital, a hedge fund with over $750 million in assets under management, we find the stock to be overvalued today.

Business Overview

S&P Global is a worldwide provider of financial services and business information with annual revenue of approximately $7 billion. It generates about half of its operating income from its ratings segment, 30% from market and commodities intelligence, and the balance from S&P Dow Jones Indices.

S&P Global is a high-quality business, that has continued to thrive even during the coronavirus pandemic. S&P Global reported second-quarter earnings on July 28th, with both revenue and earnings coming in ahead of expectations. Revenue totaled $1.9 billion, a 14% increase year-over-year, driven by strength in every segment.

Earnings increased 43% on a dollar basis to $792 million, while earnings were up 46% on a per-share basis, rising to $3.28. The ratings business produced enormous growth during Q2 thanks to companies raising liquidity in the bond markets, as well as reduced expenses from COVID-19-relate emergency cost saving actions.

The company also raised its forecast for the remainder of the year. S&P Global boosted its guidance range for adjusted earnings-per-share to $10.75 to $10.95, up $0.80 per share on both the top and bottom ends of the range.

Valuation & Total Expected Returns

S&P Global is a great business, but the stock is fairly unattractive in our view due to overvaluation, even with an excellent dividend history. S&P Global has paid dividends continuously since 1937 and is one of only 24 companies in the S&P 500 that has paid dividends for at least 47 years. However, the massive run-up in share price over the past 10 years has had the effect of lowering the dividend yield to its present level of 0.8%. This trails the average yield of the S&P 500 Index, currently at 1.8%.

Even in a world of low interest rates, S&P Global’s dividend yield is fairly unimpressive and is likely not sufficient for investors interested primarily in generating dividend income from their equity investments.

Furthermore, S&P Global’s huge share price rally over the past decade has lifted its valuation to lofty levels. Shares trade for a price-to-earnings ratio above 32. This represents a five-year high, and could indicate an overvalued stock. A declining price-to-earnings ratio would have the impact of reducing shareholder returns, and serve as an offset to the company’s earnings-per-share growth and dividends.

Final Thoughts

S&P Global is a high-quality company with a leadership position in its industry, and a long history of growth. The company has continued to perform well even during the difficult economic climate over the past year. However, shares appear to be significantly overvalued today.

We expect annual EPS growth of 9% per year in addition to the 0.8% dividend yield, but the impact of a declining P/E multiple results in total expected returns in the mid-single digits for SPGI stock over the next five years. As a result, we do not view SPGI shares as a buy right now, instead advising investors to wait for a meaningful pullback before buying.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

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Long-term dividend growth investors typically turn to the Dividend Aristocrats for investment ideas, and for good reason.
s&p global, better, price
Wednesday, 09 September 2020 05:49 PM
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