Investing in the stock market is an excellent way to build long-term wealth. Blue chip stocks can be a fantastic place to start if you decide to try your hand at stock picking. Investing in these stocks can provide stable, reliable, long-term growth. That's because these companies have strong competitive positions and track records of success.
While these stocks may not offer explosive upside potential, they can be a good source of dividends and investment returns, helping you achieve your goals of building long-term stable wealth. One company with a robust competitive advantage recently raised its dividend for the 51st consecutive year. Only 25 companies in the S&P 500 have achieved a similar feat. Here's why this stock could be an excellent addition to your portfolio.
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S&P Global's robust competitive advantage
When companies borrow money, investors need to understand the company's health, ability to repay its debts, and how risky it is to invest in that debt. This is where corporate credit rating agencies, like S&P Global (SPGI 0.07%), come in.
S&P Global, along with Moody's and Fitch Ratings, are the three major credit rating agencies, and these companies enjoy a robust competitive advantage. That's because breaking into the credit ratings business is extremely difficult.
For one, there are regulatory hurdles that a company must overcome to assess the creditworthiness of companies. Second, it has taken decades for these companies to build a reputation and gain investors' trust. As a result, those three major credit rating agencies dominate in the U.S., and S&P Global is the largest, with a 50% market share.
Although S&P Global's business can fluctuate depending on how much credit companies issue, there is always a need for financing, and when companies are ready, S&P Global stands prepared to serve them. This strong positioning provides S&P Global with an economic moat around its business, making it an excellent blue chip stock with an attractive risk-reward profile.
S&P Global has delivered market-crushing returns for decades
One sign of S&P Global's incredible stability is its long history of raising dividend payments. The company recently increased its payout by 1.1%, marking the 51st consecutive year the agency has raised its dividend.
Now, S&P Global is by no means an impressive dividend stock. After all, its annual dividend yield is 0.8%, below the S&P 500 index's dividend yield of 1.3%. However, when you combine S&P Global's dividend with its stock price appreciation, you'll see the blue chip stock's impressive history of outperformance.
Over the last decade, S&P Global stock has delivered a total return (which includes reinvested dividends) of 20.6% annually, beating the S&P 500's annual return of 12.8%. If you go back through the past three decades, the stock has returned 16.4% annually vs. the S&P 500's 10.1% return.
SPGI Total Return Level data by YCharts
These stellar returns came as S&P Global and other credit ratings agencies faced criticism for their role in the subprime mortgage crisis that came to a head in 2008, along with the 2011 downgrade of the U.S. credit rating. Its results are a testament to S&P Global's robust economic moat and ability to grow alongside the economy while riding out challenging times.
Why 2024 could be a good one for S&P Global
On the surface, S&P Global stock looks quite expensive, with its 59.6 price-to-earnings (P/E) ratio. However, the agency's earnings have been depressed due to reduced debt issuance by companies. As interest rates began rising along with market volatility in 2022, companies held off on debt issuance until there was more certainty about where rates would end up in the longer term.
However, S&P Global could soon benefit from tailwinds to its business. According to the CME FedWatch Tool, markets are pricing in five interest rate cuts by the end of this year. If rates fall during the year, the lower interest rates could entice companies waiting on the sidelines to issue debt.
In an interview with Reuters, Blair Shwedo, head of U.S. sales and trading at U.S. Bank (a subsidiary of U.S. Bancorp), said, "This should be an extremely welcome environment for corporate issuance." Early signs show a pickup in bond issuance to start the year. According to SIFMA, corporate bond issuance in January increased 27% year over year.
S&P Global is a no-brainer buy
S&P Global has a robust advantage in the credit rating industry, and its analytics business can help smooth out cash flow over time, even when its rating business slows down. Analysts expect earnings to bounce back this year, and the stock trades around a reasonable one-year forward P/E ratio of 28.
Given its long track record of success across economic cycles and potential tailwinds from a pickup in debt issuance, S&P Global is an excellent stock that investors can confidently buy today and hold long-term.
