Regular readers of Motley Fool articles have likely come across the term Dividend Aristocrat. It refers to an elite group of stocks (the current group includes 64 companies) that are members of the S&P 500 and raised their dividend payout annually for at least 25 years consecutively.
A very select subset of the Dividend Aristocrats qualifies for an even more prestigious title called Dividend King, which are stocks that raised their dividend payout annually for at least 50 or more years in a row. Only 22 S&P 500 stocks currently qualify for Dividend King status (another 20 non-S&P 500 companies also qualify).
While there are several stocks knocking on the door of this prestigious club, there is one, in particular, that stands out as a great candidate to soon join them -- S&P Global (SPGI 0.36%).
Joining an exclusive club
In September, S&P Global declared an $0.85 per share quarterly dividend, payable in December, which bumps its annual per-share payout to $3.32. That is a 7.8% increase from a $3.08-per-share annual distribution in 2021. This is the 49th straight year that S&P Global raised its dividend. Walmart, Nucor, and Archer Daniels Midland are also in year 49.
While all of these stocks may very well join the club next year, Iʻm going to focus on S&P Global because it best represents the qualities that I look for in a dividend stock.
S&P Global is best known as the company that runs the S&P 500, among several other market indices. Along with operating the indices, it has four other primary business lines, and the index business is not even its largest.
Historically, its biggest revenue generator is its credit ratings business (23.8% of overall revenue in Q3). It is one of only three major rating agencies in the U.S. and controls 40% of the market, the same as Moody's, the other dominant player.
But in this most recent quarter, with credit ratings down, S&P's largest revenue source was its market intelligence arm (35.5% of overall revenue in Q3), which provides data and analytics, risk management, and advisory services for institutional investors. This business saw an 83% year-over-year jump in revenue, primarily due to the recent acquisition of IHS Markit, a former competitor that serves many of the markets that S&P hadn't previously.
It also has a robust commodity insights business (15.1% of revenue), formerly Platt's, which provides data and solutions for the energy sector, and a new business, S&P Mobility (12.1% of revenue), which provides a similar service for the auto industry. This, in addition to its indices (11.7% of revenue), where S&P is also a market leader.
Why it's a great dividend stock
S&P Global will likely wear the crown as a Dividend King next year, as it has the type of all-weather business model that allows it to generate solid revenue in any market. For example, this past quarter, ratings revenue was down 33% year over year, while commodity insights and market intelligence were up 70% and 83%, respectively, year over year. The percentage increases were skewed somewhat by the inclusion of IHS Markit, but even before the deal closed in the first quarter, those data and insights businesses saw increasing revenues to offset declines in ratings.
The other great quality of this stock is its high margins and healthy cash flow. While the profit margin decreased last quarter due to the expenses associated with the IHS Markit merger, it is still a very high 33%, with an operating margin of 40%. It also has $2.6 billion in non-GAAP (adjusted) free cash flow, not counting merger costs, tax on gain from sale of divestiture, and other costs. It comes from having relatively low overhead as a data business and steady, repeatable income, as most of its revenue is subscription or fee-based.
In addition to all of these factors, it has competitive moats in the ratings and indexing businesses and is among the market leaders in its data businesses. It all adds up to a really solid business that will be a good bet to become a Dividend King -- and then some.