Natural monopolies are, forgive the pun, a natural place to look for companies with a large moat. Large moats allow businesses to have a little more flexibility when choosing their strategies and also allow more room for errors, as competitors can’t move in as quickly. Large moat stocks are some of the most comforting places to be in this market of uncertainty. In down markets, they are usually able to expand their market share even further, taking advantage of their size or edge.
This brings us to our monopoly of the day, NYSE Euronext (NYX). When a company is looking to go public, there aren’t many choices to be found, especially if you want to have a healthy amount of volume and exposure. NYSE provides a company with the visibility and prestige of listing on one of the most well known and oldest stock exchanges in the world.
Sure, NYSE’s monopoly has faded over the years, posting losses in market share the past twelve consecutive quarters until recently. They face stiff competition from the electronic trading market Nasdaq OMX (NDAQ) and the derivatives focused CME Group (CME).
Some would say the company doesn’t have the versatility and dynamism needed to compete against such rivals as these, but all a person needs to do is track how the exchange has evolved since its inception in 1792. I’d say there have been significant changes since then.
The company has realized that the game is changing, and the only way for it to survive and thrive like it had for so many years was to adapt. Recently, NYSE has added the Archipelago (NYSE Arca) and the American Stock Exchange (NYSE Alternext) to their list of weapons. The company also merged with the Euronext in 2007.
As of December 31, 2007, NYX combined listed companies represented over $30.5 trillion in total market capitalization and average daily trading value of approximately $141 billion. Their trading volume is expected to rise in the long-term as increased volatility means more transactions. As for new IPOs, the market will return someday, but the short-term appears bleak, with Mead Johnson Nutrition (MJN) being the only IPO this year.
With a P/E in the single digits compared to historical P/Es in the high teens, a whopping 6.5% dividend yield, and moat as strong as metal, I believe NYX will return with a roar once the market itself returns. Until then, collect the cash or buy more shares with their high dividend yield.
Disclosure: Long NYX