Income seeking investors who prioritize dividend metrics in their investment decision making process should consider CME Group (CME) as a potential investment. While it has consistently increased its dividend payout for 13 consecutive years, the real 'kicker' is the variable component.
CME's dividend policy targets a regular quarterly dividend of between 50% - 60% of the prior year's cash earnings. In addition, it declares a 'special annual variable dividend' within the first 2 weeks of December for distribution in mid-January.
Since becoming a CME investor on June 29, 2020, I have tried to estimate the value of the annual 'special dividend'. I do so by comparing CME's YTD results at the end of Q3 with the results in the corresponding time frame in prior fiscal years.
In my October 30, 2023 post, I stated:
A comparison of CME's YTD2023 results with those for the first 3 quarters of FY2020, FY2021, and FY2022 suggests CME's 'special annual variable dividend' could be $5. CME could also raise its quarterly dividend from $1.10 to $1.20. If I conservatively estimate a $4.75 'special annual variable dividend' and a $1.15 quarterly dividend, the forward dividend yield is ~4.47%. This is based on the current ~$209 share price and $9.35 ($4.75 + (4 x $1.15)) in dividends that could be distributed in FY2024.
Fast forward to December 7. CME has declared a $5.25/share 'special dividend' payable January 18, 2024 to shareholders of record on December 28, 2023.
CME is slated to distribute 1 more $1.10 quarterly dividend on December 28. To receive this dividend, however, you would have had to be a CME shareholder on December 8.
At the beginning of February, CME typically declares an increase in its regular quarterly dividend; I see no reason why the dividend would not increase from $1.10 to $1.15.
If this does materialize, the total dividend distribution in 2024 should be $9.85 ($5.25 + (4 x $1.15)).
With a $211.62 share price at the December 8 market close, the forward dividend yield is ~4.66%.
While there are higher dividend yielding investments, investors need to determine if their risk is acceptable.
My risk tolerance is such that I am not prepared to accept non-investment grade credit risk for the sake of an attractive dividend yield.
Furthermore, my interest lies in an investment's total potential shareholder return. I am happy to forego dividend income if a company can generate superior investor returns by retaining funds.
Any tax liability on capital gains can also be delayed until such time as I dispose of my investment. If all goes according to plan, this can be decades. Every year, however, I have to declare dividend income on which I incur a tax liability.
Credit Ratings
CME's senior unsecured long-term debt ratings are the lowest tier of the high-grade category and are investment grade. These ratings define CME as having a VERY STRONG capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.
- Moody's: Aa3 with a stable outlook
- S&P Global: AA- with a stable outlook
- Fitch: AA- with a stable outlook
This gives me some degree of comfort that I won't be surprised by an unexpected dividend cut.
Valuation
CME's diluted PE in FY2011 - FY2022 is 12.92, 18.77, 27.53, 29.45, 24.22, 26.89, 33.12, 14.20, 35.28, 30.34, 33.70, and 22.94.
When I wrote my October 30 post, CME's forward adjusted diluted PE ratios (using the ~$209 share price) were:
- FY2023 - 16 brokers - mean of $9.15 and low/high of $8.97 - $9.33. Using the mean estimate, the forward adjusted diluted PE is ~22.8.
- FY2024 - 16 brokers - mean of $9.39 and low/high of $8.84 - $10.48. Using the mean estimate, the forward adjusted diluted PE is ~22.2.
- FY2025 - 13 brokers - mean of $9.72 and low/high of $8.97 - $10.53. Using the mean estimate, the forward adjusted diluted PE is ~21.5.
CME's current valuation using a $211.62 share price and the current broker earnings estimates are:
- FY2023 - 16 brokers - mean of $9.17 and low/high of $8.98 - $9.33. Using the mean estimate, the forward adjusted diluted PE is ~23.1.
- FY2024 - 16 brokers - mean of $9.40 and low/high of $8.84 - $10.48. Using the mean estimate, the forward adjusted diluted PE is ~22.5.
- FY2025 - 14 brokers - mean of $9.67 and low/high of $8.97 - $10.44. Using the mean estimate, the forward adjusted diluted PE is ~21.9.
CME's valuation is roughly the same as at the time I wrote my October 30 post.
Final Thoughts
There are no changes to the final thoughts reflected in my October 30 post.
My current CME exposure of 449 shares in a 'Core' account and 331 shares in a 'Side' account within the FFJ Portfolio will likely increase by 2 shares by reason of the automatic reinvestment of the dividend to be distributed on December 28.
As a Canadian resident holding these shares in taxable accounts, I can expect to receive the following dividend income in January:
- 'Core' account: ((450 shares * $5.25) * 0.85) = ~$2008
- 'Side' account: ((332 shares * $5.25) * 0.85) = ~$1482
Note: I incur a 15% dividend withholding tax.
If the share price happens to be ~$210 when the dividend is distributed, I should receive another 9 shares in the 'Core' account and another 7 shares in the 'Side' account.
As noted in my prior post, I am not looking to increase my exposure other than through the automatic reinvestment of dividend income. This is because I think there are other existing holdings that are likely to generate superior total long term shareholder returns.
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 CME.
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.
