The company has minted millionaires with decades of capital gains and dividend growth.
Most investors know the S&P 500 stock market index but usually stop there. S&P stands for Standard & Poor’s, referencing S&P Global (SPGI -1.67%). The company is the majority owner of the joint venture that operates the S&P 500. However, market indexes are only about 11% of the business. If you peel back the onion’s layers, you’ll see that S&P Global is a juggernaut in the global financial markets.
S&P Global provides various products and services centered around data and research, including analytics and insights into markets and investments, corporate credit and debt ratings, and commodities markets.
The stock is a beast, having returned over 107,000% since the 1970s, including 51 consecutive annual dividend increases!
Unsurprisingly, the stock consistently trades at lofty prices. Should investors wait to get into the stock? Or are they better off jumping in and letting this proven compounder work its magic?
Here is whether S&P Global is a buy, sell, or hold today.
S&P Global prints cash for its shareholders
The company operates several segments, but its core business revolves around Market Intelligence, Ratings, and Commodity Insights. Together, these segments contribute 78% of total revenue and 74% of profits. These segments represent research, data, analytics, and ratings that investors use daily, from individuals to hedge funds and banks.
S&P Global’s branding is a competitive advantage. The company’s roots date back over a century, to its initial founding in 1860. When financial institutions need data, paying more for the most dependable sources is generally not an issue. A great example is its dominance (one of two primary ratings companies) in corporate credit. Companies that issue debt almost always procure a rating from S&P Global because bond investors expect it and trust the company’s name.
The business is highly profitable since most of S&P Global’s value lies in non-physical assets. The company earned $13.8 billion in revenue over the past four quarters, converting $5.1 billion (37%) to free cash flow. That has helped management make S&P Global a Dividend King with consistent dividend raises, contributing to the stock’s excellent long-term performance.
There are healthy growth opportunities on the horizon
One of the best things about S&P Global is the company’s position for long-term growth on big-picture trends.
Below, you can see three trends:
- The global population is rising.
- The global economy is growing.
- U.S. corporations are borrowing more.
World Population data by YCharts
More people and economic output mean more investors, banks, and other entities S&P Global can sell to in the future. Meanwhile, U.S. companies, representing the largest percentage of market cap across global markets, continue to borrow. A recession could temporarily slow these trends, but it’s clear where they have gone over decades.
S&P Global’s leadership in the financial markets makes it a direct beneficiary of these trends. Analysts expect the company to grow earnings by an average of 14% annually over the long term, so growth is alive and well at S&P Global.
Buy, sell, or hold? Here is your answer
It’s probably evident at this point that S&P Global is still a stellar business that long-term investors should enthusiastically own. However, price always matters, and that’s the burning question as the stock nears its 52-week highs today.
Since 2016, the stock has traded at an average price-to-earnings ratio of 32.8, well below today’s level. The PEG ratio is a great metric to compare a stock’s valuation to its growth rate. S&P Global’s PEG ratio (3.2) is beyond where I generally feel comfortable buying high-quality stocks (up to 2.0 to 2.5).
Both vantage points indicate that S&P Global’s stock is a bit expensive.
SPGI PE Ratio data by YCharts
A word of caution: Excellent stocks can stay expensive for years. If you own shares, think twice before selling because the price may never dip as you hoped. S&P Global is a fantastic business; owning the stock may be wiser than trading it based on its valuation.
That makes the stock a hold in my book, but it’s ultimately up to individual investors to decide for themselves.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends S&P Global. The Motley Fool has a disclosure policy.
