Warren Buffett, through his investment vehicle Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), is well-known for his love of financial industry stocks. The company has long held monster stakes in familiar sector names such as American Express and Wells Fargo.
But it's one of the portfolio's lower-profile financials that's about to drop a cool $10.85 million into Berkshire's coffers in the form of a substantially higher dividend.
In the mood for a higher return
I won't keep anyone in suspense. That stock is Moody's (NYSE:MCO), which just declared a 16% hike in its quarterly dividend to $0.44 per share.
Moody's, S&P Global's Standard & Poor's, and private held Fitch Group comprise the "Big Three" credit rating agencies. Collectively, the trio dominates the U.S. ratings segment with over 95% market share. Moody's and Standard & Poor's more or less split 80% of the market, while Fitch is in distant third place with roughly 15%.
Although Moody's has expanded its business into various segments related to research and analytics, Investors Service -- the division that houses the ratings activity -- still comprises the bulk of its revenue.
That works to its advantage because like its citizens, America's businesses love to borrow money. In every year since 2011, total corporate debt issuance has risen to new record highs; 2017 was well on pace to smash the record yet again, at levels approaching $1.6 trillion.
That's a lot of credit that needs to be rated -- most institutional investors won't touch corporate debt unless it's been evaluated by one of the agencies, and gets at least a half-decent rating. Being one of the majors, Moody's is a direct and substantial beneficiary of this volume.
In its most recently reported quarter, the company delivered a hearty 16% year-over-year increase in revenue, to $1.1 billion. Adjusted net profit was $295 million ($1.52 per share), a 10% increase. That shakes out to a rich 28% net profit margin.
It's clear that management believes there's more where that came from, as it upped its profitability guidance for the entirety of fiscal year 2017. It added $0.50 to either end of the range, and is now expecting adjusted EPS of $5.85 to $6 for the year. Revenue should rise in the low-teens percent range, the company predicts.
Moody's core business has a fairly wide moat, is extremely profitable, and seems headed toward a brighter future. It's been a winner for the Oracle of Omaha and Berkshire -- its total return is roughly 1,400% -- since Berkshire first disclosed its stake in late 2000.
Although Berkshire has sold some of its Moody's position since then, it's still a major shareholder -- as of Sept. 30, 2017, its nearly 25 million shares gave it an almost 13% stake in the company. With Moody's recent results and that generous dividend raise, we can imagine Berkshire will hold on to most, if not all, of that for years.
Spreading the wealth
Buffett and fellow Moody's investors will receive the newly raised dividend on March 12, if they're shareholders of record as of Feb. 20. The new amount yields 1.1% on the most recent closing stock price, and its payout ratio is a comparatively light 29%.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Moody's. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.