One thing certain about the current state of the markets is that they are uncertain. So many variables have so many traders going in so many directions right now. These variables include the COVID-19 pandemic and the development timeline of a potential vaccine, the upcoming U.S. elections (both for the White House and Congress), the potential for another stimulus package, the unemployment situation, GDP growth (or the lack of it), and the potential of a tech bubble, just to name a few. Economists and market experts have been making calculations and trying to figure out which variable might represent the tipping point for recovery or a deeper drop-off.
At this point, nothing is off the table, including a second major market crash in 2020. As an investor trying to deal with this uncertainty, you want a diversified portfolio that can help you better level out the steep ups and downs and maybe produce some long-term positive results.
When it comes to your investments focused on generating income, you want to make sure that the stocks you rely on for dividend income will produce -- even in the worst-case scenarios. One financial sector stock that you can count on in this way is S&P Global (NYSE:SPGI).
S&P Global's stock price is up 30.7% YTD
S&P Global is the parent company of the S&P Dow Indices, which runs the S&P 500, the Dow Jones Industrial Average (through a partnership), and various other market indexes. While the indices business is perhaps the most well known, it accounts for the least amount of overall revenue for the company, about 12%. S&P Global makes most of its money as a ratings agency -- about 51% of revenue -- where it is one of only three major companies that rate the credit worthiness of bonds. It also has market intelligence businesses, including Platt's, which sells data and research for investment professions at banks, financial firms, pensions funds, governments, and other entities. These businesses account for about 37% of revenue.
S&P Global has had an excellent year, with its stock price up about 30.74% year to date, buoyed by strong earnings, primarily from the credit ratings business. Net income was up 40% year over year to $842 million in the second quarter while year-over-year revenue climbed 14% to $1.9 billion. The rating business saw quarterly revenue increase 26% over the prior year to $1 billion. Revenue for the credit ratings segment is tied to the issuance of bonds, and S&P Global saw record quarterly issuance of U.S. investment-grade credit in the quarter. S&P Global gets paid for the ratings, so the year-over-year transaction revenue increased 48% to $624 million due to an overall increase in global bond issuance.
Because of the pandemic, the company was able to reduce expenses by 6% through corporate restructuring efforts, like having employees work at home. The combination allowed the company to boost its profit margins year over year by 920 basis points to 56.9%.
S&P Global qualifies as a Dividend Aristocrat because it has increased its dividend payout to shareholders every year for at least 25 straight years (in S&P Global's case the total is now at 46 straight years). If it continues to perform as it has, in four years it will qualify for the very select Dividend King designation (50 straight years of dividend increases).
For the third quarter, S&P Global declared a $0.67 per share dividend, the same as the previous quarter. The dividend grew 16% this year, and over the past decade, the dividend has grown by about 10% annually. The company pays out $2.68 per share annually at a yield of 0.77%. The payout ratio -- or percentage of earnings paid out in dividends -- is a very manageable 24%.
Building a reputation for consistent earnings growth
S&P Global has had consistent double-digit annual earnings growth over the past decade, and that is expected to continue this year and for the next few years. Even if the market crashes again, and debt issuance declines, S&P Global has such a wide and deep moat as one of three major bond credit rating agencies, there is little chance of it losing market share. It currently has a 40% market share, along with Moody's (NYSE:MCO), while Fitch Ratings has about 15%. This is not the type of industry that's conducive to lots of competition because having too many rating agencies waters down the validity of the ratings, and the established firms have the brand equity that the market indices trust. Plus, the income is all subscriber- and fee-based -- from the rating business to the indices to the market intelligence -- so the company generates consistent income.
That income is not as tied to the economy and interest rates, so the company does not struggle as much as banks and financial institutions during a recession. It's three major business segments are all fee- and subscription-based, which provides steady revenue in all types of markets, particularly within the indices and credit rating arms, where the company is a market leader with a wide moat. As long as there are bond issues and stock markets, Standard & Poor's Global is going to generate revenue with little competition. In fact, in times of high volatility, the number of transactions rises and increases the fees collected. And with its asset-light business model, it has strong profit margins (around 36%) and lots of free cash flow to continually invest in the business.
S&P Global has survived the market's ups and downs for the last half-century without reducing its dividend. With its business model that does well regardless of the broader economy, increasingly diverse revenue streams, and competitive standing and edge, S&P Global will continue to generate earnings -- and a dividend that investors can rely on.