We live in an uncertain world, and effective risk management solutions are in high demand. This has been a boon for CME Group (CME 0.60%). The exchange operator's profits have surged in recent years, as traders of all sorts have come to recognize the value of its products and services as a means to lessen their exposure to risk.
Yet with CME's shares already up more than 20% this year and 240% over the past decade, is its stock still a good buy today? Read on to find out.
CME Group's products are popular among traders. Image source: Getty Images.
A strong competitive position
CME Group operates the world's largest exchange and clearinghouse for futures contracts, which are increasingly popular financial instruments that help financial businesses, governments, and individuals manage risk.
CME offers trading in futures -- which allow two parties to trade a specific asset or instrument at a set price by a set date -- in six broad areas: interest rates, energy, equities, agricultural commodities, metals, and foreign exchange. Traders value CME's liquidity and wide selection of products, which its competitors find difficult to match.
CME is an exceptionally profitable business. As a mostly electronic intermediary, CME receives a small fee for each futures contract traded on its exchange. These contracts cost CME very little to execute. And with its exchange infrastructure largely in place, revenue from additional trading volume falls almost entirely to the bottom line. In turn, CME generates one of the highest operating margins you'll find among publicly traded businesses, to the tune of 63.5% in the past year.
Multiple growth drivers
Trading volumes have been on an upward trajectory for decades -- a trend that's likely to persist in the years ahead. Rising trade volumes -- particularly in international markets such as Asia and Latin America -- should continue to serve as a tailwind for CME's business.
CME Group's average daily trading volumes have risen at a 13% compound annual growth rate since 1972. Image source: CME Group Q3 2018 earnings presentation.
Additionally, CME's proven ability to launch new products and enter new markets should help to further fuel growth. A recent example is its Bitcoin futures product, which has met with rapidly growing demand from cryptocurrency traders.
Moreover, CME has demonstrated the discipline required to jettison underperforming businesses. The company recently closed its unprofitable European exchange and clearing house, after recognizing that its customers preferred to trade on its more liquid U.S. exchanges. By focusing on its most profitable operations, CME has positioned itself to enjoy a powerful combination of higher revenue and rising margins in the coming years.
An income investor's dream
Better still, CME management is committed to passing the company's growing profits on to shareholders in the form of a rising stream of dividend income. CME raised its quarterly cash dividend by 6% to $0.70 in February, putting its yield -- based on its current $182 stock price -- at a respectable 1.5%.
But in addition to its regular quarterly dividend, CME typically pays a variable annual dividend based on its earnings. Since 2012, the company has targeted a payout equal to about 50% of its net income. Thus, CME's investors have been rewarded with total annual dividend payments amounting to yields of more than 5% annually on average over the last six years. This variable dividend policy is one of the most intriguing aspects of CME Group from an investment perspective, as it helps to directly tie the company's fortunes to that of its investors.
CME Group has paid out sizable cash dividends to shareholders in recent years. Image source: CME Group Q3 2018 earnings presentation.
All told, CME's stock can currently be had for about 25 times forward earnings estimates -- a fair price to pay for a competitively advantaged business that's projected to grow its earnings by more than 15% annually over the next half-decade.
As such, investors seeking a high-quality -- and high-yield -- dividend stock may want to consider buying some shares of CME Group today.
