Dividend Constancy Champion, Not Necessarily Representing Typical Value-Oriented Investment Approach (S&P Global)

S&P Global, or SPGI, is an intriguing stock pick of mine. This capital-light business dominates various sectors, including financial data, debt rating, and market indices. Over the past year, it generated a whopping $14.494 billion in revenue, boasting a market cap of over $155 billion and a place on the Dividend Aristocrats list, thanks to its uninterrupted dividend increase over 25 years.

Recently, the share price of SPGI has been gyrating and following the general trends of the market, resembling a V-shaped recovery. However, a price of $438 is out of the question for the short term. But hey, I still believe this stock is worth snatching at $500, making a "buy" my rating for S&P Global.

From Gloomy to Brighter Macro Outlook

Let's kick things off with a hiccup in SPGI's previous financial release. In late April, the company revised its guidance due to the murky macroeconomic climate. At the time, the company projected:

A midpoint total revenue growth of 5% (previously anticipated 6%).
A 50 bps reduction in adjusted operating margin (49%).
A reduced adjusted diluted EPS midpoint by 12.5 cents to $17.

Segment

The lead reason for this downward revision was mainly due to their Ratings and S&P Dow Jones Indices segments, while Market Intelligence, Mobility, and Commodity Insights remained unchanged in their forecasts. Specifically, the Ratings segment took a hit due to lower projected economic growth resulting from tariffs and higher spreads. Additionally, the outlook for M&A transactions was initially sound, but now is expected to be flat for 2025. Furthermore, the Index business saw a decline due to the S&P 500 experiencing a drawdown of -9.36%, leading to lower anticipated asset-linked fees from asset managers.

Revenue (in millions)

The good news? These gloomy scenarios have improved significantly compared to two months ago. Investment banks like Goldman Sachs have trimmed their 12-month recession probabilities to 30%, whereas in April, these forecasts stood at 45%. This positive economic outlook has become a tailwind for the Ratings segment as companies grow more confident in issuing debt. To top it off, the Michigan Consumer Sentiment Index has seen a remarkable recovery, confirming this reversal from the negative trend after crossing above 60.

Revenue Growth YoY

Q1 Financial Performance

Based on Morningstar, S&P Global falls under the large-cap blend investing style category. In simple terms, this business isn't expected to experience explosive growth, but it isn't in a consolidated sector either, offering a moderate price-to-book value.

S&P Dow Jones Indices

During Q1, S&P Global reported a 8% year-over-year increase in revenues, reaching $3.777 billion. Although this isn't a shabby figure, it's below the company's average growth of 10% in the previous four quarters. Despite the slight dip in growth, the company enjoyed an improved operating income margin that expanded beyond 50%, leaping 10 bps compared to the same quarter last year.

$445

Source: SPGI Q1 Update

15%

Let's delve into the segments:

| Segment | Revenue (in millions) | Revenue Growth YoY ||-------------|---------------------|---------------------------|| S&P Dow Jones Indices | $445 | 15% || Commodity Insights | $612 | 9% || Mobility | $420 | 9% || Ratings | $1,149 | 8% || Market Intelligence | $1,199 | 5% |

Commodity Insights

Meanwhile, the S&P Dow Jones Indices segment displayed the most substantial growth, increasing its top line by 15% year over year, helping from climbing asset prices over the previous year. On the other hand, Commodity Insights, Mobility, Ratings, and Market Intelligence expanded at 9%, 8%, and 5%, respectively.

$612

Spin-Off Mobility Segment

The rumors about the potential separation of SPGI's Mobility segment are no longer just whispers. The board has given the green light to the spin-off, which should be completed in the next 12 to 18 months. Although the corporate action will reduce the market cap initially, S&P Global's overall profitability margins are likely to increase. In 2024, the Mobility segment showcased a standalone adjusted operating margin of 39%, compared to the weighted average of the other segments (S&P Dow Jones Indices, Commodity Insights, Ratings, and Market Intelligence) boasting an adjusted operating margin of approximately 50% and revenue growth of around 14%. Consequently, this split will result in an enhancement of margins and potentially improved post-split revenue growth.

I'm confident that this business separation will generate value for S&P Global and its shareholders.

Mobility

Risks for the Next 12 Months

$420

As with any investment, S&P Global comes with risks:

The successful completion of the Mobility segment's spin-off requires regulatory approval and specific timeframes to be tax-free for investors. Failure to meet these conditions could lead to pressure on the stock price.
Trading on innovation in Market Intelligence becomes essential, especially in light of the current AI revolution. The company must make investments to stay competitive with industry leaders like Bloomberg, MSCI, Moody's, FactSet, Refinitiv Eikon, PitchBook, and more.
A significant portion of the Ratings segment depends on revenue components that are cyclical to the credit cycle. Though macroeconomic expectations have improved, the outlook for debt issuance in 2025 remains subpar, considering monetary policy projections based on the futures market suggest only two rate cuts by the end of the year.

Comparative Valuation

Ratings

With the market turmoil, S&P Global's stock dropped by approximately -19.39% from February highs. The company quickly recovered afterward due to its strong business fundamentals and moat as the leading rating agency and index provider. As of now, the stock is trading at a forward PE ratio of 26.5x, aligning with its historical average, indicating that the stock is fairly valued.

$1,149

The two firms most similar to S&P Global are Moody's Corporation (MCO) and MSCI (MSCI). In comparison, S&P Global has a slightly lower forward valuation than the other firms, making the valuation attractive. However, its dividend yield is significantly lower than MSCI's, although this lower payout ratio also accounts for this contrast.

Final Thoughts

S&P Global is a remarkable company that boasts a market-leading position in many sectors. In Q1, amid the challenging macro situation, the company reduced its guidance for the overall business due to headwinds, particularly in the Ratings and Index segments. However, over time, these obstacles have lessened, and the market has recovered significantly. Thespin-off of the mobility segment is also coming soon. All signs point to a positive outlook for the company's 2025 results in their next earnings release.

Market Intelligence

The spin-off of the mobility segment presents an opportunity to add value to S&P Global and its shareholders. Management also has a target to distribute 85% of the adjusted free cash flow through dividends and share repurchases. Lastly, the valuation of the business appears reasonable compared to its historical averages and competitors.

$1,199

With these reasons and a stock price of $500 still seeming like an excellent opportunity, I reiterate my "buy" rating on S&P Global.

In light of S&P Global's positive outlook and the improving macroeconomic conditions, investing in this business could provide a lucrative opportunity for personal-finance enthusiasts seeking growth in their portfolio.
With the technology sector playing an increasingly significant role in the finance industry, it's essential for companies like S&P Global to make strategic investments to remain competitive, particularly in areas such as data analytics and AI.
As S&P Global continues to dominate various sectors, including financial data, debt rating, and market indices, its position in the business world is bolstered, providing a stable foundation for future growth.
With sports and entertainment becoming more intertwined with personal finance and technology, there is a growing potential for partnerships or acquisitions between these industries and companies like S&P Global, creating further opportunities for growth and diversification.