CME Group Inc. (CME) is an appealing long-term growth stock with a unique attractive dividend which is missed by stock screeners.
In August 2018 I initiated a position and intended to preiodically add to my position. The company's valuation, however, ran away on me. I, therefore, patiently waited on the sidelines until such time as I deemed CME's valuation to be reasonable. The time has now come and I have acquired additional shares for the FFJ Portfolio.
- CME’s share price has retraced from the ~$225 level reached in early March 2020 at which time I deemed shares to be richly valued.
- CME will not be reporting Q2 results until the end of July 2020 but based my conservative earnings estimates for the remaining 3 quarters of the current fiscal year I view shares as reasonably valued.
- Many investors rely on stock screeners to seek potential investments with dividend yield being a metric frequently used. The company’s unique dividend policy might result in many investors overlooking CME as a potential investment.
My intent was to increase my position other than solely through automatic dividend reinvestment but CME’s valuation ran away from me. Fast forward to just under 2 years after I initiated my CME position and I now see that CME’s valuation now seems reasonable. Given this, I have acquired another 300 shares at ~$162/share.
If you are unfamiliar with CME, I encourage you to read Part 1 of the FY2019 10-K in which you will find a comprehensive overview of CME’s business and risk factors.
Q1 2020 Financial Results
While Q2 2020 results are to be released July 29, 2020, you can access Q1 results (3 months ending March 31, 2020) here. The world has changed considerably subsequent to the March but this is the most current financial information currently available.
Moody’s initiated coverage in July 2008 and assigned an unsecured long-term debt credit rating of Aa3. This rating has remained unchanged since such time.
S&P Global has assigned an AA- unsecured long-term debt credit rating since February 2012 and this rating has remained unchanged.
Both ratings are the lowest tier of the High grade category and should appeal to a conservative investor.
Free Cash Flow (FCF)
CME consistently generates strong free cash flow which enables it to maintain its unique dividend policy.
In FY2010 – 2019, it generated ~$1.2B, ~$1.18B, ~$1.08B, ~$1.15B, ~$1.15B, ~$1.4B, ~$1.64B, ~$1.67B, ~$2.32B, and ~$2.43B in free cash flow. In Q1 2020, CME generated ~$0.7B in FCF.
I reference my February 15, 2019 article in which I touched upon CME’s valuation.
Fast forward to the present and we see that CME reported $2.14 in diluted EPS for Q1. If we conservatively estimate that CME will generate $1.80 in diluted EPS for each of the remaining 3 quarters of the current fiscal year then we get estimated annual diluted EPS of $7.54.
With shares currently trading at ~$162 we arrive at a forward diluted PE of ~21.5. This level compares favorably with the levels reported in several years during the 2010 – 2019 timeframe (22.48, 12.92, 18.77, 27.53, 29.45, 24.22, 26.89, 33.12, 14.20, and 35.28).
Dividend and Dividend Yield
CME’s dividend and stock split history can be accessed here.
With the recent pullback in CME’s share price we see that the $0.85/quarterly dividend now results in a ~2.1% dividend yield on the basis of a ~$162 share price.
CME, however, has a unique dividend policy which includes the payment of a ‘variable special dividend’ every January. In January 2020, for example, CME paid dividends of $1.2B which included the annual variable dividend for 2019 of $0.894B; the ‘variable special dividend’ distributed in January 2020 was $2.50/share.
Delve further into the details and we see that CME has returned ~$13.5B to shareholders in the form of dividends since the implementation of the variable dividend policy in early 2012.
Although we have no way of knowing what CME’s ‘variable special dividend’ will be in January 2021, if we presume CME will distribute $2.50 as it did in January 2020, investors would receive $0.85 x 4 quarters plus $2.50 for a total of $5.90. On the basis of the current ~$162 share price this results in a ~3.64% dividend yield.
It took much longer for CME’s valuation to retrace to a level I view as fair/attractive. It appears, however, the time has now arrived and I have taken this opportunity to acquire another 300 shares.
It certainly is difficult in this environment to predict FY2020 earnings. I do, however, like CME’s long-term prospects and using what I think are conservative estimated quarterly diluted earnings for the last 3 quarters of the current fiscal year, I think shares are currently reasonably valued.
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I wish you much success on your journey to financial freedom.
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Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long CME.
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.