If you're an active investor, you probably follow the three major indices that track the stock market. Of course, there's the Dow Jones Industrial Average, an index of 30 large, blue-chip stocks from across all sectors of the economy. Then there's the S&P 500, a broader index of 500 companies, and finally there's the Nasdaq Composite, which tracks the stocks on the Nasdaq exchange and tends to be more oriented toward tech companies.
Often, investors will buy index funds that follow these indices. But there's another intriguing choice they might also consider: investing in the company that manages two of the indices. S&P Global (SPGI -0.20%), long known for rating companies, also oversees the Dow Jones and S&P 500 indices. It has some other attractive businesses, too, and it actually navigated the downturn better than all three indices.
Let's dig in and see if it's still a good investment now.
A model of consistency
While it's not a Dow Jones stock , S&P Global has all the characteristics of one. It has a huge brand, it is a market leader in multiple businesses, it has a history of increasing earnings, and it pays out a reliable dividend -- which it has increased for an incredible 49 straight years.
And as an investment, it has been remarkably consistent. Until last year, when it was down 28%, S&P Global's stock price had not had a negative year since 2008. So far in 2023, it is back in the black, up about 5%.
And if you look at the long-term returns, they are excellent and easily outperform the Dow. In fact, over the past five- and 10-year periods, it also beats the S&P 500 and the Nasdaq Composite, as the chart above shows. S&P Global has an annualized return of 13.2% over the past five years and 21.1% over the past 10 years.
Massive earnings power
S&P Global's valuation fell after last year's stock price decline. Its price-to-earnings multiple is now 33, which is still slightly higher than its recent historical range, but well down from 41 at the end of 2021.
But the company still has great earnings power as a leader -- with a sizable moat -- in two of its businesses. It is the market leader in the credit ratings business, among only three major players. It is also one of the largest among a handful of competitors in the index business as it owns the S&P 500, and all the other S&P indexes, as well as the Dow Jones Industrial Average.
It has a third major revenue stream, its Market Intelligence business, which has been a significant grower. The great thing about this business is that it provides balance, often generating revenue when the other two primary businesses are down.
In the first quarter, the Market Intelligence business saw revenue increase 47% year over year, due mainly to the acquisition of IHS Markit. This business generated more revenue, about $1 billion, in the quarter, than ratings, which generated $824 million.
Earnings were down in Q1 due to expenses related to costs associated with the IHS Market purchase, as well as a higher gain on dispositions in Q1 2022. That caused the operating margin to drop some 43 percentage points to 36.2%, but the adjusted operating margin -- excluding one-time merger-related costs and financials -- was up 100 basis points to 46.2%.
Because of its business model -- which produces steady, recurring revenue primarily from fees and subscriptions -- S&P Global generates huge margins and has lots of cash flow. At the end of Q1, S&P Global had $1.4 billion in cash and $488 million in free cash flow, up $337 million from a year ago. Its liquidity will be even better in May after it completes the sale of its Engineering Solutions business to KKR. Around that time, the company plans to begin $1 billion in stock buybacks.
S&P Global has been one of the consistently strong performers on the market over the past decade-plus, and there is nothing that signals any change to its dominance over the next decade-plus.
