S&P Global: Good Growth Prospects And Attractive Income Profile

| About: S&P Global (SPGI)

Summary

S&P Global provides information products and services to the financial industry. It is very well positioned to benefit from structural changes in the industry.

Its shareholder remuneration policy is clearly supported by its good cash flow generation capacity and a strong balance sheet.

S&P Global has a long history of dividend growth and share buyback programs, making its 4.5% total yield very attractive to income investors.

S&P Global (NYSE:SPGI) has a very good business profile, with a mature and profitable ratings business that is very well complemented by its growth units. These units should benefit from structural changes in the financial industry, namely the rise of passive investing and the demand for market data and intelligence. This enables S&P Global to have a strong cash flow generation capacity and good growth prospects, leading to a very attractive shareholder remuneration policy through dividends and share buybacks.

Business Overview

S&P Global provides information products and services to the financial and commodities markets. The company recently changed its name from McGraw Hill Financial to S&P Global, to better reflect its core businesses and capitalize on its S&P brand. It has more than 20,000 employees in about 30 countries and about 40% of its revenues are generated internationally. It has a market capitalization of about $34 billion and trades on the New York Stock Exchange.

S&P Global has a diversified business, even though its S&P Ratings unit represents about half of revenue and profits. Its remaining businesses have better growth prospects, including S&P Global Market Intelligence, S&P Dow Jones Indices and S&P Global Platts. Therefore, S&P Global's business can be split into two main areas, namely its mature and stable ratings business and other growth opportunities.

S&P Global has sharpened its strategic focus over the past few years, performing several acquisitions and divestments to adapt its business mix to the current needs of the financial industry. In 2012, it divested McGraw-Hill Education, focusing on the financial services industry. Since then, it has invested significantly to improve its financial services offering, like the $2.2 billion purchase of SNL Financial in 2015 which added another source of intelligence and increased the number of sectors the company covers. Going forward, S&P Global seems to be very well positioned to benefit from structural changes that are currently happening in the financial industry.

One structural tailwind is the rise of passive investing and the increasing number of exchange traded funds (ETFs) which follow a benchmark index. Through its index business, the company should benefit from the shift to passive investing by steady license data growth over the coming years. Another trend is the rise of automated trading and quantitative investing, which require access to market data and analytical tools, something that S&P Global provides through its Market Intelligence unit. These two businesses together represent about 40% of S&P Global's revenues and should enjoy high-growth rates for the next few years.

Reflecting its good business profile, the company has a very good recent growth history. Over the last five years, it has reported very strong figures regarding top-line, net profit and earnings-per-share (EPS) growth. Its revenues increased at a compounded annual growth rate (CAGR) of 7% over the past five years, but even more impressive has been its operating profit growth due to much higher efficiency and a different business mix with more weight of high-margin businesses within the group.

Indeed, S&P Global also has increased its efficiency through strong cost control, delivering a much higher operating margin than a few years ago. The company successfully completed its 2014-16 $140 million cost reduction initiative, leading to an increase of about 600 basis points (bps) in its adjusted operating margin during this period. Going forward, further efficiency gains may be more limited, but there still exist synergies from the SNL integration and a higher operating margin may be achieved in the next few quarters.

Financial Overview

Regarding its most recent financial results, S&P Global has maintained its good operating momentum in 2016, delivering another year of positive financial performance. Its revenues increased by 6.5% to $5.6 billion and its operating profit was $2.4 billion. S&P Global was able to increase its adjusted operating margin by 300 bps, to a new record level of 42.9%. Due to a lower number of shares outstanding, its EPS was up by 14% to $5.35. Over the past five years its EPS CAGR was 18%, a very impressive achievement.

For the next year, the company's guidance is for mid-single digit organic revenue growth, adjusted EPS of $5.90-6.15 and free cash flow of about $1.6 billion. According to analysts' estimates, S&P Global should continue to deliver solid growth figures in the next few years and its operating margin is expected to improve to about 45% by 2019, being a positive factor for its earnings growth in the next few years. Going forward, the company's strategy is to continuing adding capabilities and reshaping the portfolio, in search of the best growth opportunities. It has good prospects in its index and market intelligence businesses, while its rating business should continue to be a cash cow.

Regarding its shareholder remuneration, S&P Global has a strong track record delivering a growing dividend and has performed several share buyback programs over the past few years. Reflecting its shareholder-friendly policy, S&P Global has a long history of growing dividends, being one of the few companies in the S&P 500 index that have increased its dividend annually for at least the last 44 years.

In 2016, S&P Global has returned about $1.5 billion through share repurchases and dividends to shareholders. Its annual dividend was $1.44 per share, an increase of 9.1% from the previous year. Its dividend payment frequency is quarterly and its last quarterly payment was increased to $0.41, leading to an annual dividend of $1.64 related to 20176 earnings. This represents an annual increase of close to 14%, showing the company's confidence in the business prospects. At its current share price, S&P Global offers a dividend yield of 1.3%. However, considering the company's share buyback program its total yield increases to about 4.5%.

S&P Global's attractive shareholder remuneration is supported by its very good cash flow generation capacity. In 2016, its free cash flow amounted to nearly $1.5 billion, increasing from the $1.2 billion free cash flow generated in the previous year. Its free cash flow was enough to finance its $1.1 billion repurchase of shares and $380 million distributed in dividends. Taking this into account, S&P Global's shareholder remuneration is clearly sustainable and should continue to grow in the next few years.

Additionally, S&P Global has a strong balance sheet and intends to maintain an investment-grade credit rating, being another supportive factor for its shareholder remuneration policy. The company had a net cash position in 2015, but with the large acquisition of SNL it increased its balance sheet leverage. At the end of 2016, its net debt amounted to $1.2 billion and its net debt-to-EBITDA ratio was 0.4x. This means that S&P Global has very low financial leverage and has the capacity to increase its indebtedness to make acquisitions or finance a growing dividend and perform share buybacks.

Conclusion

S&P Global's attractive business profile should lead to steady growth over the coming years, supporting a very attractive shareholder remuneration policy through dividends and share buybacks. Its total yield of about 4.5% seems to be sustainable in the long-term, taking into account the company's good cash flow generation capacity and strong balance sheet, making S&P Global quite attractive for income investors.

Disclosure: I am/we are long SPGI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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