While most stocks like to stay as far away from market volatility as possible, MarketAxess (MKTX 0.10%) and its electronic bond-trading platform play a contrarian role. Typically, MarketAxess sees increased trading activity the more volatile the market gets -- much like its stock market counterpart tends to see.
However, with the CBOE Volatility Index (affectionately known as VIX) trading at its lowest levels since 2019, the market remains surprisingly calm despite inflation worries and possible recession fears. Although this feeling of comfort is good for the broader market, it has temporarily hampered MarketAxess's results, sending its revenue down 1% during the second quarter of 2023.
This has helped cause the company's share price to plunge nearly 46% from its 52-week highs as United States bond traders have less need to trade in and out of bonds in today's quiet environment.
Despite these short-term pressures, MarketAxess remains the leader in electronic bond trading. Now trading at what may be a once-in-a-decade valuation, here's why MarketAxess looks like a premiere S&P 500 dividend stock to buy and hold forever.
MarketAxess: Bringing bond trading into the digital age
While electronic bond trading may not sound like a high-flying investment proposition, MarketAxess has delivered 1,300% total returns since its initial public offering in 2004. Furthermore, over the last decade, the company has averaged annualized revenue and free cash flow (FCF) growth rates of 14% and 20%, respectively.
Leading the charge for these incredible results are MarketAxess's all-to-all Open Trading marketplace and a bond-trading industry that is severely outdated. Enabling all-to-all trading between any of its over 2,000 clients, the company's platform is a dramatic upgrade to placing bond trades over the phone with broker-dealers.
Despite this, Chief Financial Officer Christopher Gerosa estimates that only 40% of U.S. high-grade and 30% of U.S. high-yield bonds (the company's two most significant markets) are traded electronically, on platforms like those of MarketAxess. Additionally, he estimated that emerging markets have an even lower level of being electronically traded, at just 5% to 7%. Estimating that these figures could all grow as high as 80% to 95% at maturity for each bond group, Gerosa believes tremendous opportunity lies ahead by simply modernizing the industry.
Growth options abound
In addition to riding this megatrend of trading bonds electronically, MarketAxess has several promising growth areas poised to carry its shares higher. While its core U.S. high-grade and U.S. high-yield bond markets may temporarily remain weak, these smaller offerings offer exciting growth optionality:
- International clients and Eurobonds: International active clients grew 7% to over 1,000 clients, while Eurobonds delivered an average daily volume (ADV) growth of 30%. MarketAxess now has an estimated 18% share of the Eurobond market, placing it on par with the company's leadership positions in U.S. high-grade and U.S. high-yield bonds.
- Municipal bonds: ADV for municipal bonds grew 6%, but MarketAxess's peer Tradeweb believes only 12% to 15% of the municipal bond market is traded electronically, leaving a massive runway for growth.
- Data and automated trading: Jumping by 24%, the company's data services tie in nicely with its Auto-X automated trading solution, enabling clients to place no-touch trades, creating higher efficiency. The trade volume for these Auto-X trades grew by 27% and has more than tripled over the last three years, highlighting its clients' appetite for algorithmic trading processes.
Thanks to this well-rounded attack on growth, MarketAxess is uniquely positioned to continue growing for decades, regardless of where temporary weaknesses arise, such as the current environment.
Why buy now?
Following its near halving from its 52-week highs, the company trades at just 29 times FCF -- its lowest valuation since 2015.
MKTX Price to Free Cash Flow data by YCharts.
With its valuation knocked down, MarketAxess's dividend yield has spiked to a 10-year high of 1.4%.
MKTX Dividend Yield data by YCharts.
Sporting a beautiful net profit margin that has averaged 39% over the last five years and a payout ratio of only 43%, the company is perfectly positioned to continue raising a dividend that has risen more than tenfold since 2011.
With MarketAxess posting this incredible profitability thanks to its leadership position in a bond industry that is rapidly shifting to electronic trading, I can't help but think this price looks cheap for this magnificent S&P 500 dividend grower.
