CME Group Is A Unique Dividend Gem

In the 2nd half of 2020, energy prices were somewhat range-bound after recovering from the COVID drop in the first half of 2020. More effective vaccines and an improvement in the vaccination rate may lead to a better than previously anticipated recovery in the economy and demand for oil.

On the equities front, there was a resurgence in retail investor interest in equities in 2020. This led to equity index derivatives volumes being ~60% higher than in 2019. I don’t know if the retail trading activity will abate. The increased popularity of $0-commission trades at retail brokerages, however, has undoubtedly led to a permanent increase in retail engagement.

On the plus side, CME Group has assembled a diverse set of derivative products in:

  • interest rates;
  • equities;
  • commodities;
  • metals; and
  • foreign currency.

Weakness in one product is often offset by strength in another. CME Group also stands to benefit from rising volatility; trading volume should increase thus leading to increased revenue.

On the downside, there is always a risk that deregulation could result in customers avoiding the clearinghouse model.

Free Cash Flow (FCF)

In fiscal year 2020, CME Group generated ~$2.5 billion of free cash flow versus $2.4 billion, $2.3 billion, $1.8 billion, $1.7 billion, $1.4 billion, $1.2 billion, $1.2 billion and $1.1 billion in FY2019 to FY2012. This steady improvement in FCF gives management more flexibility to meet:

  • annual mandatory capital expenditures;
  • debt repayment;
  • dividends;
  • share repurchases.

Financial Guidance

CME Group had initially targeted $0.11 billion in run-rate synergies by the end of 2020 related to the NEX acquisition. By year-end, it had achieved a total of $0.14 billion in synergies net of additional costs incurred to run parallel infrastructures as the company continues to work on the migrations to Globex. On the Q4 earnings call, management reiterated its commitment to its $0.2 billion annual run-rate synergies target by the end of 2021.

Fiscal year 2021 adjusted operating expenses excluding license fees are expected to increase slightly from the low 2020 levels to $1.575 billion.

On the capital expenditures front, excluding one-time integration costs and net of leasehold improvement allowances, management expects to spend ~$0.18 billion to ~$0.19 billion. The fiscal 2021 adjusted effective tax rate is expected to be 23.2% – 24.2%.

On January 12, 2021, CME Group and IHS Markit announced the formation of a leading ‘Post-Trade Services Joint Venture for OTC Markets‘. This joint venture will be a leader in trade processing and risk mitigation services and will offer the combined clients complementary services across the global OTC marketplace in interest rate, FX, equity and credit asset classes.

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Disclosure:  I am long CME. I disclose our holdings which are held in the FFJ ...

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