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This S&P Global Inc. (SPGI) stock analysis is the third in my series of analyses of Financial Data & Stock Exchanges industry participants. Previous posts within this series are accessible here.
I view the Financial Data & Stock Exchanges industry as an attractive industry in which to invest for the long term and currently have exposure to the following in retirement accounts, for which I do not disclose details, and/or in the FFJ Portfolio:
- S&P Global (SPGI) - guest post at Dividend Power
- Moody's (MCO)
- CME Group (CME) - guest post at Dividend Power
- Intercontinental Exchange (ICE)
These industry participants will release earnings on the following dates and I intend to review each company shortly following their respective earnings release.
- FactSet Research Systems Inc. (FDS) - released September 28
- Nasdaq, Inc. (NDAQ) - released October 20
- S&P Global Inc. (SPGI) - released October 26
- MSCI Inc. (MSCI) - released October 26
- CME Group Inc. (CME) - released October 27
- Morningstar, Inc. (MORN) - released October 27
- Intercontinental Exchange, Inc. (ICE) - October 28
- Moody's Corporation (MCO) - October 28
- CBOE Global Markets, Inc. (CBOE) - October 29
- TMX Group Limited (X.to) - November 8
Value Line, Inc. (VALU) released its Q1 2022 results for the quarter ending July 31 on September 13, 2021. This is a small-cap company ($0.31B market cap). I do not invest in small-cap companies, and therefore, do not intend to review it.
I have reviewed SPGI on various occasions and most recently in my guest post at Dividend Power for which a link is provided above.
Business Overview
A good overview of SPGI's business and the risk factors can be found in Part 1 of the FY2020 10-K.
Merger With IHS Markit
As noted in previous posts, SPGI is acquiring IHS Markit (INFO) in an all-stock transaction that values INFO at an enterprise value of $44B, including $4.8B of net debt.
SPGI anticipated the closing of this acquisition in the second half of FY2021. The close, however, is now expected to occur in Q1 2022.
When the merger was announced in November 2020, it was noted that regulatory approval was required in five jurisdictions (Canada, The European Union, Taiwan, The United Kingdom and the United States). Substantial progress with all these regulators has been made and several remedies must be undertaken to complete the merger.
INFO will divest OPIS, the coal metals and mining and the PetroChem Wire businesses. The sale of these assets to News Corp has already been announced. In addition, INFO must divest its Base Chemicals business and SPGI must divest CUSIP Global Services and Leveraged Commentary and Data together with related leveraged loan indices. Both companies will begin the process of selling these additional businesses shortly.
The revenue from the businesses being divested is only ~$0.425B.
S&P Global - Stock Analysis - Financials
On October 26, 2021, SPGI released Q3 and YTD2021 results (Form 8-K and Earnings Presentation).
Source: SPGI - Q3 2021 Earnings Presentation - October 26, 2021
Source: SPGI - Q3 2021 Earnings Presentation - October 26, 2021
FY2021 Guidance
Because SPGI now anticipates the closing of the merger with IHS Markit in 2022, it can provide FY2021 GAAP guidance for the first time.
Source: SPGI - Q3 2021 Earnings Presentation - October 26, 2021
Adjusted diluted EPS guidance, which excludes merger expenses and amortization of intangibles related to acquisitions, has been increased by $0.50 - $0.55 to a new range of $13.50 - $13.65. Guidance for FCF excludes certain items and has also been increased to a new range of $3.6B - $3.7B.
The changes in the guidance are primarily due to greater revenue growth in SPGI's Ratings and Indices lines of business.
Source: SPGI - Q3 2021 Earnings Presentation - October 26, 2021
S&P Global - Stock Analysis - Credit Ratings
Moody's continues to rate SPGI's senior domestic unsecured debt at the A3 level. This rating is stable and is the lowest tier of the upper-medium grade investment-grade category.
The rating defines SPGI as having a VERY STRONG capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.
I feel comfortable with this level of risk.
Dividend and Dividend Yield
The dividend history found on SPGI's website only dates back to 1995. The company, however, has distributed a dividend for almost 50 years. I have no reason to think SPGI will have an issue growing and servicing future dividends following the merger.
The 4th quarterly $0.77/share dividend is payable on December 10th. I expect at least a $0.07/share dividend increase to be announced at the end of January 2022.
The 0.066% dividend yield is based on a $0.77/quarterly dividend and the current ~$465 share price. If the dividend increases to $0.84/quarter, the dividend yield will only be ~0.07%.
As a Canadian resident who holds SPGI shares in two taxable accounts, I incur a 15% dividend withholding tax so my dividend yield is even lower. I do not approach an investment in SPGI from the perspective of dividend yield and dividend income but rather total potential investment return.
Capital gains will very likely continue to be the primary manner in which investors will benefit from an investment in SPGI. Given this, it is exceedingly important to acquire shares at an attractive valuation.
The repurchase of treasury shares in FY2018 – FY2020 amounted to $1.66B, $1.24B, and $1.164B.
SPGI's weighted average number of shares outstanding over the FY2011 – FY2020 timeframe (in millions of shares) is 304, 285, 280, 272, 275, 265, 259, 253, 247, and 242.
No share repurchases are being made in light of the impending merger with INFO. They, however, remain a component of SPGI’s total capital return program. We can likely expect SPGI to reinstate share repurchases in FY2022. In fact, on the Q3 earnings call, management indicated the proceeds of the divestitures noted earlier in this post will contribute to additional capacity for share repurchases.
S&P Global - Stock Analysis - Valuation
If I look at SPGI's valuation on a stand-alone basis, I deem SPGI to be overvalued. Shares are trading at ~$465 and FY2021 GAAP guidance is $12.50 - $12.65. This gives us a forward valuation of ~36.8 - ~37.2.
Furthermore, FY2021 adjusted diluted EPS guidance is now $13.50 - $13.65 thus giving us a forward adjusted diluted PE range of ~34.1 - ~34.4.
The adjusted diluted EPS estimates reflected on the 2 discount brokerage platforms I use are currently:
- FY2021 - 18 brokers - mean of $13.36 and low/high of $13.05 - $13.84. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~34.8 and ~33.6 if I use $13.84.
- FY2022 - 18 brokers - mean of $14.49 and low/high of $13.72 - $15.30. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~32 and ~30 if I use $15.30.
- FY2023 - 16 brokers - mean of $15.97 and low/high of $14.95 - $17.18. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~29 and ~27 if I use $17.18.
I view these valuation levels to be too rich to warrant the purchase of additional shares.
S&P Global - Stock Analysis - Final Thoughts
The financial statements will look very different from SPGI's Q3 2021 financial statements once SPGI and INFO merge. In all likelihood, depreciation and amortization of intangible assets will increase significantly. These charges will negatively impact EPS so we will need to closely focus on Free Cash Flow (FCF) as opposed to EPS.
The estimated FY2021 – 2023 cumulative FCF guidance for the combined company was ~$14B when the INFO acquisition was announced. The acquisition, however, was announced November 30, 2020, and a close in the 2nd half of FY2021 was anticipated. Almost 11 months have elapsed since the announcement and the transaction is only slated to close in Q1 2022.
As much as the combined entity will likely be far more valuable than the combined value of the 2 stand-alone entities, I am not prepared to acquire additional shares at the moment. I want to see the financial statements and the FY2022 - FY2023 adjusted diluted EPS estimates for the merged entity from the brokers which cover SPGI before making an investment decision.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long SPGI, MCO, CME and ICE.
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decisions without conducting your research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
