The financial sector has not been the best place to exploit good stock buying during the pandemic and resulting recession – at least in general terms. The sector is down around 18% year-to-date, far underperforming the S&P 500, which is up about 7%. But that doesn’t mean you can’t find great financial stocks, both now and in the long run.
Of course, there is a lot of uncertainty in the industry due to a variety of factors, from the economy to interest rates. But there is one stock in particular that I love in the long run, no matter what the market and the economy do in the short run: Global S&P (NYSE: SPGI).
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An annualized return of 26% over the last 10 years
S&P Global is probably best known for its stock market indices, namely the S&P 500 and the Dow Jones Industrial Average (which it manages in partnership), among others. But it is S & P’s credit rating business that accounts for the bulk of the company’s annual revenue, around 51%, compared to index business, which accounts for 12%. The market intelligence branch – including Platts, which provides data and research to investment professionals – accounts for 37% of revenue.
But the three combined give S&P Global a great mix of activities that helps the company generate profits throughout virtually any market cycle.
Proof of this is in profits, as the company has seen double-digit annual profit growth steadily over the past 10 years. This is reflected in a stock price that has not had a negative annual return since 2008. Over the past 10 years, the stock price has had an annualized return of 26%. Even this year, certainly volatile, it gained 23.5% until the close on Friday.
Let’s look at what drives success.
Moats in abundance
The scoring business has been the cash cow over the years because it is protected by a wide and deep ditch. There are only three major debt rating agencies in the United States: S&P Global, Moody’s, and Fitch. S&P and Moody’s hold most of the market at 40% each, followed by Fitch at 15%. There is little competition, and it will remain so, as the scoring space is highly regulated and does not need more than a few players. Income is all fee based, so it generates constant income, which increases when debt issuance is high. In the last quarter, S & P’s rating business generated $ 1 billion in revenue, a 26% jump and $ 693 million in profit, a 51% increase from the previous year.
These issue revenues are consistent, but even when they are declining, the index and market intelligence branches – which are also fee and subscription based – take over.
Like the rating arm, S & P’s index business has a wide divide, in that there is little competition and it generates constant income, charging fees to listed companies as well as fees for transactions. and transactions. So when markets are more volatile, commission income is usually higher. In the second quarter, index activity saw profits jump 5%, but the year before it had peaked at 19%. It is the leadership position in these two well-protected markets that sets S&P Global apart from its competitors.
Additionally, S&P Global is low in assets which means it doesn’t own a lot of physical assets and therefore has low overheads. This gives it strong profit margins (around 36%) and a lot of free cash flow. The company’s operating profit margin jumped 920 basis points (or 9.2 percentage points) in the second quarter to 56.9%, driven by the rating business, where the margin was nearly 69 %. This generates a lot of free cash flow for the business to invest. In the first six months of 2020, it had $ 1.5 billion in cash on hand, up from $ 936 million in the first six months of the previous year.
The other thing to love about S&P Global is its dividend. The stock has achieved coveted Dividend Aristocrat status as it has increased dividend payout to shareholders for at least 25 consecutive years. S&P Global has done this for 46 consecutive years, which means it is approaching the high status of Dividend King – 50 consecutive years of dividend increases. The company approved a dividend of $ 0.67 per share for the third quarter, which stands at $ 2.68 per share per year (although a return of 0.8%).
From earnings to revenue and a business model designed to withstand any environment, S&P Global is a stock you can set and forget.
10 stocks we prefer over S&P Global
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Dave Kovaleski has no position in the stocks mentioned. The Motley Fool owns shares and recommends Moody’s. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.