Dividend Increase: CME 2018

The CME Group is comprised of the Chicago Mercantile Exchange, COMEX, Chicago Board of Trade, and the New York Mercantile Exchange.  CME is the largest group of derivatives exchanges in futures contracts and options.  Basically, really cool shit trades on their exchanges that money managers would be interested in using to hedge their portfolios.  Volumes have been increasing consistently year over year on these exchanges.

The other day CME announced their 5th straight year of dividend increases.  The quarterly dividend was increased from $0.66 to $0.70 per share, representing a 6.06% increase for the year.  This brings the current dividend yield to 1.79%, based on a closing price of $156.85.  This increase meets my expectation of a $0.04 increase to the dividend for the year.  CME has had 13 dividend increases since going public in 2003.  You should also read about their history of special dividends, which is like walking down the street and finding big  dollar bills sitting on the street (about $1000 extra in my case this year)

A Look at the Regular Dividend History:

The above spreadsheet looks solely at the regular quarterly dividend and does not include any of the special dividends.
What’s impressive about the dividend from CME, despite having 3 years with no increase and snapping streaks, is the growth of the quarterly dividend.  Since paying the very first quarterly dividend of $0.028 back in 2003, up to the most recent upcoming dividend of $0.70 in 2017, the average annual growth rate has been an amazing 24.20% per year.  Imagine your annual pay increasing that much every year.  When we look at the annualized dividends from 2003 to 2018, dividend income alone has grown a total of 2,400%.  Simply amazing.   I have been long CME since IPO and have acquired more through regular purchases and from M&A activity with CBOT and NMX.  Regardless of stock performance, because I’ve held onto the position for so long, the stock kicks out good returns for me, even if the stock were flat on the year.  If you haven’t explored my Yield on Cost post, it’s worth a read and mentions how XOM kicks out great returns because of dividend growth and buy and hold in the neighbor hood of 8% per year (and this is based on data from years ago).  That article has also been picked up on a few sites, so it must be decent.

So 2 questions to ask: How has the stock performed? and Is the dividend sustainable?

CME vs S&P500

If a picture is worth a 1000 words, then I guess this picture shows you that CME has handily outperformed the S&P500 by over 1000% since 2003.  So the answer to how has the stock performed? One word, amazingly.  That orange line that looks like it has flat lined is the S&P500 and it’s actually up 200% during the time frame.  CME is up almost 1800%.

Company Stats:

Market Cap: $53.38Billion
PE Ratio: 13.14

Dividend Yield: 1.79%
Beta: 0.82
Profit Margin: 111.49%
Total Cash: $1.99 Billion
Total Debt: $2.23 Billion
Payout Ratio: 58.50%

Healthy profit margin, good cash on hand, relatively low debt.  Looking at that payout ratio, shows they still have room for increasing their dividend years down the road, while also continuing their occasional special dividends. In what has been a multi-year difficult time frame to find stocks that don’t have ridiculous P/Es that your paying, CME is actually attractive.  Aside from the payout ration increasing slightly over last year, all the other number have gotten even stronger.  I’ve had a long love affair with these specialty derivative exchanges, and may be partial because my focused area of research in college was derivatives, but a company who can literally come up with new regulated derivative contracts to provide hedges for the big money managers, is literally able to print money.  They were second to market for bitcoin futures, and bitcoin investors/speculators can provide a hedge against the volatility of the price fluctuations and lock in profits.

Conclusion:

February 11, 2017 I said I had a 2 year price target of $140 on the stock.  I was absolutely wrong.  The company hit that target way sooner and even exceeded expectations. Crazy thing, I still believe the stock has room to run trading at these real modest valuations.  Price target for 2 years is a conservative $170 and high single digit dividend growth.  I’ve written countless times that I believe CBOE is the natural next acquisition target for CME.  This has been my ongoing speculation for years…and I still believe that to be the case.

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