Dividend Increase: CBOE Holdings (CBOE)

CBOE Holdings (CBOE) is the holding company for the Chicago Board of Options Exchange, the largest domestic options exchange.  Today, CBOE announced an 8.70% increase to their quarterly dividend, bring the new amount to $0.25 per share from the prior $0.23.  This marks 6 years of continuous increases to their dividend with the occasional special dividend thrown in the mix, since going public in mid 2010.  Reflecting the new payout, that brings the yield on CBOE to 1.46%.  Not the highest yielder in my portfolio, but I like the potential long term continued growth of that dividend (provided they don’t get bought out).

I’ve been a big fan of specialty exchanges.  This is my exposure to financials as an alternative to exposure in the big banks which have lower margins, highly leverage balance sheets, and are subject to the Fed stress test.  Since the turn of the century, we’ve had quite a few become publicly traded (CBOT, NYMEX, CME, CBOE).  I have been an owner of all of them shortly after their IPO.  The interesting thing to look at when looking at those 4 exchanges, only 2 of them still exist under their own control.  CME years ago purchased both the NYMEX and CBOT.  I believe it is just a matter of time before the CBOE is also under the control of the CME.  To me, it just makes sense from a product line up, operationally, and geographic standpoint.

Let’s take a quick look at some numbers on CBOE:

Market Cap: $5.56Billion

P/E Ratio: 26.71

Beta: 0.39

Profit Margin: 32%

Total Cash: $107Million

Total Debt: What Debt! $0

Payout Ratio: 35%

About the only knock I have on the stock at this point, that P/E is at the high end, as the stock is just slightly off all time highs.  But damn the company has a sexy balance sheet, with room to grow that dividend at a 2-3 cents per year for a very long time.  This is a very conservatively run company.  One that’ve I’ve felt for years could easily be absorbed by CME, without hurting the attractiveness of CME itself.

So, until that buyout happens, I will sit on CBOE, collect a nominal yield that has plenty of room to grow, and take its market beating performance.

CBOE

Let’s take a look at that dividend I keep talking about:

As you can see, the short dividend history shows a dividend growth rate of 16.65% on average.  I believe in the neighborhood of about 10% is a good safe rate of growth to expect on the dividend (between 2-3 cents per year), meaning your dividend income from this holding should double in roughly 7 years.  If we look at the total annual dividend income received annually, that averages out to growing at 34.17% per year.  Even backing out the outliers from that average, we get 17% per year.

But what about those special dividends you mention?

Well, shareholders have received 2 special dividends in the 7 years of being publicly traded.  But taking that into account we see:

Suddenly, the average annual dividend payments received jumps to 48.71% on average.  The special dividends are a rare occurrence, but I did want you to be aware of them.  Especially, in the case of CME special dividends tend to happen pretty regularly.

So there you have it, a quick profile and look at the short history of CBOE.

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Readers Comments (2)

  1. It’s fascinating to me what companies you’ve purchased stocks with. My plan for stocks is to buy in base industries that will exist as long as humans do – food, health care, farm equipment repair, gases, etc. I worry about financial industries and insurance. The shake up potentials seem so big. Thanks for continuing to share with us.

    • Yep, not a bad idea in creating a base for your portfolio to have companies/industries that we will always need. I actually expect another time to come when a few of the companies that dominate the grocery store aisles to merge in order to cut cost and boost margins. When you look at some of those companies from their market caps, it surprising how small some of them really are. Prime for a merger I think.

      I like CBOE and CME for exactly the opposite reasons I don’t like the banks. Nice balance sheets, profit margins, not regulated like the banks, and not highly leveraged either (or at all in the case of CBOE). Plus we’ll always need the exchanges for trading. As floor trading slowly dies off and everything becomes electronic, that should further reduce cost and improve margins.

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