S&P Global

Cash flow from financial data and rating services

Especially as a long-term investor, it's absolutely essential to diversify your stock portfolio broadly. Companies go bankrupt again and again - blind buy & hold mixed with little diversification makes for a deadly combination. In my opinion, anyone who chooses buy & hold as a strategy should review their investments at least once a year and check whether everything is still going well. If you want to outsource the whole thing and simply profit from the success of an index like the S&P 500, you can of course do that wonderfully with an ETF.

In today's article, though, I only want to deal with ETFs to a limited extent. At this point, I'm happy to mention my guiding principle once again: "Go through the world with your eyes open and you'll find great investment opportunities everywhere." So let's take a look behind the scenes, turn to the publisher of the S&P 500 and take a closer look at its lucrative business model.

The history and business model of S&P Global Inc.

The story of S&P Global Inc. begins in 1812, when Henry Varnum Poor was born. In 1835, he became the first in his family to finish college and began working at his uncle's law firm. A little later, he opened his own law office together with his brother John. The two invested their savings in the up-and-coming lumber industry and were able to build up a solid fortune this way. John, who was a keen railroad magnate, bought the American Railroad Journal in 1849 and put Henry in charge of it. At this point we need to make a little detour: at the beginning of the 19th century, the nationwide expansion of the railroad networks was in full swing. This undertaking required an enormous amount of financing that banks alone couldn't cover. Many loans simply weren't enough, and some banks didn't want to get involved in this high-risk business at all - investments not infrequently ended in a total loss. Henry recognized the urgent need, and so in 1860 he published the magazine "History of Railroads and Canals in the United States", in which he compiled comprehensive information about the financial and operating condition of all American railroad companies. Demand was so high that he promptly decided to found the H.V. and H.W. Poor Company with his son Henry William and to publish an updated version of the magazine every year from then on.

With his company, Henry laid the foundation for today's rating agencies. Thanks to his information, investors could get a much clearer picture of the railroad companies and make more rational investment decisions this way. With the aim of providing various financial information about non-railroad companies, Luther Lee Blake founded the Standard Statistics Bureau in 1906. He decided against a book published once a year and instead went with a handy index card system that he could update more frequently. Business went excellently and Luther was able to keep expanding his company. Starting in 1923, for example, he published a weekly index made up of 233 stocks. When the company merged with the Poor Co. in 1941 to form the Standard & Poor's Corporation, the index already listed 416 companies. Finally, on March 4, 1957, the S&P 500 was published, tracking the 500 largest publicly traded American companies.

Before we get to today's S&P Global Inc., we need to make one more little jump back in time, to 1885. Back then, the teacher James McGraw sacrificed his savings to become a co-owner of the trade magazine "American Journal of Railway Appliances". He bought a few more magazines and founded The McGraw Publishing Company in 1899. John Hill also published several technical trade publications and founded his own company, The Hill Publishing Company, in 1902. In 1909, the two merged and The McGraw-Hill Book Company was born. Gradually, the company focused on various textbooks and schoolbooks. To position itself more broadly, it bought the rating agency Standard & Poor's in 1966. It wasn't until 2011 that it spun off the publishing business, and since then it has focused entirely on providing financial information. In 2016, it changed its name to S&P Global Inc. and today operates in four business areas: the regular ratings business (S&P Global Ratings), benchmark price assessments for commodity markets (S&P Global Platts), real-time data and analytics for institutions (S&P Global Market Intelligence) and index calculations (S&P Dow Jones Indices).

How will S&P Global's business go in the future?

We really are living in crazy times. Some companies are fighting for survival, others are doing the deal of the century right now. What we've already experienced on the stock market this year alone is making history: first the rapid coronavirus crash, which was over again in record time as well, then for the first time in stock market history we see a negative futures price, and on top of that we witness the death of a DAX high-flier. Crazy!

S&P Global can of course count itself among the winners of the crisis. During the COVID-19 pandemic, many investors turned to the bond market to raise liquidity. The central bank also bought up all kinds of corporate bonds to provide market liquidity. And who delivers the necessary data, financial information, analyses and ratings? S&P Global, of course, which was able to show solid growth in all four of its business segments. At the same time, the financial services provider managed to cut its costs - which also has to do with the fact that over 99% of all employees are still working from home. Overall, the company generated revenue of 1,943 million US dollars in the second quarter of 2020, an increase of 14 percent compared to the prior-year quarter.

Let's quickly take a look at the ratings business in general. Overall, you can say that there are only 3 major rating agencies: S&P Global and Moody's with a market share of just under 40 percent each, and Fitch with a share of just under 20 percent. Because of many regulations, the barriers to entry for new competitors are extremely high, which creates a certain moat effect. S&P Global generates around half of its revenue with this segment, which also makes it much more broadly positioned than its two main competitors. The second-largest revenue driver is Market Intelligence, which delivers data, tools and research on a subscription basis. The same goes for the Platt's segment, which provides prices and analytics for commodity markets. Finally, S&P Global records around 14% of its revenue from its index business.

I'm very confident that the financial data mogul will continue to post a solid, fast-growing business in the future. After all, it grows both on its own and through fitting, future-proof acquisitions. Artificial intelligence and cutting-edge algorithms play a paramount role here.

And what about the dividend?

The company has been sharing its profits with shareholders since 1937. Since 1973, it has also managed to raise its dividend every year - the dividend growth rate over the last 10 years is 11.2 percent, and over 5 years this figure is even above 16 percent. With such great growth, you can live with the low dividend yield of 0.7 percent. The Dividend Aristocrat is convincing in terms of payout ratio too: just 24.3 percent of profits are paid out - so enough money stays in the company to keep growing in the future.

Conclusion:
At the very beginning, I asked myself the question: is S&P Global Inc. better than the S&P 500? Over a 20-year span, the index's performance is just under 130% and that of S&P Global a fabulous 1075%. Mind you, I left dividends out of this. I think this result speaks for itself.