S&P Global (SPGI) has paid a dividend annually since 1937 and has increased its dividend annually for at least the last 48 years. However, some investors may rule it out as a potential investment because of its sub 1% dividend yield.

As investors, we have our respective objectives and goals which influence our investment decision-making process. If dividend income is of primary importance, it is understandable why SPGI may not be an ideal investment. I, however, consider SPGI to be a good investment from a total investment return perspective.

On October 25, 2018, I initiated a position within one of the ‘Side’ accounts in the FFJ Portfolio.

I subsequently initiated a position in MCO in the same account on October 26, 2018.

My rationale for investing in SPGI and MCO is I have no idea which company will generate the best long-term return. In addition,

• they are leading global integrated risk assessment firms;
• their respective valuation was reasonable;
• they are not capital intensive companies;
• they generate strong Free Cash Flow (FCF); and
• the outlook for both firms is promising.

The purchase price in 2018 was $175.88. The quarterly dividend at the time was $0.50 resulting in a ~1.1% dividend yield. As a Canadian resident who holds these US-listed shares in a taxable account, I incur a 15% dividend withholding tax. My dividend yield at the time of purchase was, therefore, ~1%.

On January 19, 2021, I re-analyzed SPGI and acquired additional shares at $307.651/share. I hold these shares in a taxable account that is a component of the ‘Core’ accounts within the FFJ Portfolio.

On March 16, 2021, I transferred the SPGI and MCO shares purchased in 2018 between investment accounts for tax planning purposes. SPGI’s share price at the time of transfer was ~$349 and that of MCO was ~$297. These transfers triggered capital gains but future capital gains will be taxed at a favourable rate.

While SPGI’s long-term outlook is positive, the share price has appreciated rapidly since the beginning of 2021. We can not rule out a pullback and must be careful not to grossly overpay to acquire shares. Ask any investor who invested in Intel (INTC) or Cisco (CSCO) at the height of the .com craze. Twenty years later and their respective share price has still not reached the peak share price!

SPGI – An Impending Dividend King – Overview

SPGI is synonymous with credit ratings. However, SPGI’s operations are far broader. It currently has 4 reportable segments:

• S&P Global Ratings;
• S&P Global Market Intelligence;
• S&P Global Platts; and
• S&P Dow Jones Indices.

Part 1, Item 1 in the FY2020 10-K provides a good overview of each segment.

Item 1A discloses and addresses key identifiable risks.

The FY2020 edition of SPGI’s comprehensive annual Investor Fact Book also contains a wealth of information.

SPGI – IHS Markit Merger

In addition to the existing reportable segments, SPGI and IHS Markit (INFO) announced on November 30, 2020, that they had entered into a definitive merger agreement to combine in an all-stock transaction which values IHS Markit at an enterprise value of $44B, including $4.8B of net debt.

The merger of unique and highly complementary assets will leverage the innovation and technology capabilities of both companies to enhance the customer value proposition.

The anticipated benefits of combining both companies include, but are not limited to:

• improved recurring revenue;
• margin expansion; and
• strong free cash flow.

Source: S&P Global + IHS Markit Investor Presentation – November 30, 2020

Source: S&P Global + IHS Markit Investor Presentation – November 30, 2020

To meet regulatory approval for the merger, both companies announced on August 2, 2021, the decision to sell IHS Markit’s Oil Price Information Services (OPIS); Coal, Metals and Mining, and PetroChem Wire businesses to News Corp in a cash transaction valued at approximately $1.15B.

The sale is to close at the same time the merger between SPGI and INFO closes. This merger remains subject to further review and approval by regulators and antitrust authorities.

If all proceeds according to plan, the divestiture of OPIS and the merger will close in Q4 2021.

SPGI – IHS Markit and CME Joint Venture

In addition to the impending SPGI and INFO merger, INFO and CME Group (CME) announced on September 1, 2021, the launch of OSTTRA, a joint venture. OSTTRA is a new post-trade services company.

Post-trade services are all the processes that take place once a trade has occurred. This includes all the activities that enable the safe transfer of ownership of securities from the buyer to the seller in return for payment. These activities include clearing, settlement, custody and asset servicing, and reporting.

Although financial terms are not disclosed, IHS Markit will make a $0.113B equalization payment to CME to achieve 50/50 ownership and shared control in the joint venture.

We also see $1.4475B of assets are held for sale on CME’s Balance Sheet in the 10-Q as of March 31, 2021. In January 2021, CME reclassified these net assets that will be contributed to its JV with INFO.

Once the SPGI and INFO merger is complete, CME’s OSTTRA JV partner will be SPGI.

SPGI – An Impending Dividend King – Expansion In China

If you are reluctant to invest directly in Chinese companies, you can gain exposure to one of the world’s largest economies by investing in high-quality North American companies that have exposure to the Chinese economy. SPGI is such a company.

SPGI has identified significant opportunities to expand its business into major geographic and product markets (including China) and is in the process of such expansion efforts.

Source: SPGI – UBS Financial Services Virtual Conference – August 11, 2021

Expansion into new markets requires significant levels of investment and attention from management. Despite these costs, there is no assurance these markets will develop as anticipated or that SPGI will have success in these markets. SPGI could potentially be unable to recover its investment to expand into this market and may forgo opportunities in more lucrative markets. This could adversely impact SPGI’s business, financial condition, and results of operations.

SPGI – An Impending Dividend King – ESG Initiatives

On November 21, 2019, SPGI announced its intent to acquire the Environmental, Social, and Governance (ESG) Ratings Business from RobecoSAM. This acquisition included the widely followed SAM* Corporate Sustainability Assessment (CSA) – an annual evaluation of companies’ sustainability practices. The CSA is recognized as one of the most advanced ESG scoring methodologies, as it draws upon 20 years of experience analyzing sustainability’s impact on a company’s long-term value creation.

This acquisition closed on January 10, 2020.

Source: SPGI – FY2020 Investor Fact Book

Following the acquisition of RobecoSAM’s ESG Ratings Business, SPGI is in a unique position to promote sustainable business practices through the adoption of industry-leading practices and the integration of climate-related metrics and considerations into its products and services.

SPGI’s portfolio now includes comprehensive company-level ESG metrics, vital data, market benchmarks, analytical tools, and standards to help customers create resilient strategies to maximize financial performance, build a sustainable future, and meet the expectations of an evolving market.

SPGI – An Impending Dividend King – Credit Ratings

Moody’s and Fitch currently assign A3 and A- ratings to SPGI’s senior unsecured domestic debt with a stable outlook.

Both ratings are the bottom tier of the upper-medium grade investment-grade category. These ratings define SPGI as having a STRONG capacity to meet its financial commitments. SPGI, however, is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than companies in higher-rated categories.

As much as I do not know what the merged company’s financial position will look like, questions would likely arise if SPGI’s credit ratings are downgraded an on-investment grade. I am, therefore, confident SPGI will ensure its capital structure leads to the maintenance of an investment-grade rating following the merger; the Investor Presentation that accompanies the merger announcement shows that SPGI intends to ‘maintain a prudent and flexible capital structure’.

Source: S&P Global + IHS Markit Investor Presentation – November 30, 2020

SPGI – An Impending Dividend King – Current Valuation

With so many moving parts, of which one is the transformative merger with INFO that is slated to close within the next few months, it is difficult to determine the merged company’s valuation.

Once the companies have merged, the financial statements will look very different from recent historical financial statements and it will be easier to gauge a reasonable valuation for the merged company.

In all likelihood, depreciation and amortization of intangible assets will balloon from the figures reported on SPGI’s recent financial statements. Earnings per share (EPS) will be negatively impacted by these charges but since these are not capital intensive businesses such as airlines, railroads, and automotive manufacturers, we will need to closely focus on Free Cash Flow (FCF) as opposed to EPS.

For the moment, management’s FY2021 – 2023 cumulative FCF guidance is ~$14B.

Source: S&P Global + IHS Markit Investor Presentation – November 30, 2020

SPGI – An Impending Dividend King – Dividends and Share Repurchases

Dividends and Dividend Yield

SPGI has distributed a dividend for almost 50 years. The company is currently a Dividend Champion and Dividend Aristocrat. and will most likely become a Dividend King. The dividend history found on the company’s website, however, only dates back to 1995. The dividend history before 1995 might be of interest but is irrelevant for our purposes. Of importance is SPGI’s ability to grow and service future dividends.

Based on management’s outlook, it appears SPGI will have no issue growing and servicing future dividends following the merger.

The following image reflects the extent to which SPGI has outperformed the S&P 500 from the day I initiated a position.

Source: www.tickertech.com

There is no assurance SPGI’s share price will appreciate to the same extent as in the past ~2.87 years. Based on management’s expectations, however, investors can likely expect the bulk of future investment returns to be mostly capital gains. I would not, therefore, fixate on SPGI’s dividend.

As noted earlier, I hold SPGI shares in taxable accounts. As a Canadian resident, the 15% dividend withholding tax reduces my dividend yield to ~0.6% and not ~0.7% ($0.77 quarterly dividend and a ~$450 share price).

Although the dividend yield is unattractive, it has no bearing on my decision to invest in the company.

Share Repurchases

SPGI has not repurchased shares YTD in light of the impending merger with INFO. The repurchase of treasury shares in FY2018 – FY2020, however, amounted to $1.66B, $1.24B, and $1.164B.

Looking at the historical 10-Ks, we see a reduction in the weighted average number of shares outstanding over the FY2011 – FY2020 timeframe (in millions of shares): 304, 285, 280, 272, 275, 265, 259, 253, 247, and 242.

Share repurchases remain a component of SPGI’s total capital return program.

SPGI – An Impending Dividend King – Return on Invested Capital (ROIC)

Companies largely exist to take capital from investors and to earn a return on this capital. This is why investors should look for businesses with durable competitive advantages that are able to consistently deliver high returns on invested capital (ROIC).

ROIC is a profitability or performance ratio that aims to measure the percentage return that a company earns on invested capital. It shows how efficiently a company is using investors’ funds to generate income.

Warren Buffett, Berkshire Hathaway’s CEO, repeatedly states that the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. In Buffett’s 2007 Letter to Shareholders, there is a segment entitled ‘Businesses – The Great, the Good and the Gruesome’ in which Buffett describes the kind of businesses that are appealing and those which should be avoided.

In the FY 2018 – FY2020 timeframe, SPGI has generated ROIC (%) of 50.52, 47.67, and 47.01. MCO, on the other hand, has generated 26.09, 24.59, and 25.41 during the same timeframe.

In my recent JNJ post, I indicate that some investors may like the company because of its superior credit quality, consecutive years of dividend increases, and dividend safety. Although I am long JNJ, I am not looking to increase my position as I think there are other companies from which investors can derive superior long-term returns. In fact, JNJ’s ROIC in FY2018 – FY2020 is 16.9, 17.01, and 15.93 which is well below that of SPGI.

When I compare SPGI’s and MCO’s ROIC potential (I presume recent historical results can be replicated over the coming years) versus that of JNJ, it is difficult to justify deploying new money toward the purchase of JNJ shares.

SPGI – An Impending Dividend King – Final Thoughts

I like SPGI’s long-term outlook and I plan to increase my SPGI exposure. However, I will wait until the merger with INFO is complete and consolidated financial statements and management guidance are available.

Furthermore, I would like to see the updated adjusted diluted EPS estimates from the brokers which cover SPGI.

The INFO merger is transformational and is unlike the many smaller deals SPGI has completed in recent years. While there is no reason to suspect it will not go smoothly, there are inherent risks when merging companies as large as SPGI and INFO.

I am also increasingly cautious given the current ‘frothy’ market conditions.