Last update on 2024-06-27

CME Group (CME) - Dividend Analysis (Final Score: 3/8)

CME Group (CME) Dividend Analysis reveals a score of 3 out of 8, assessing the performance and stability using an 8-criteria system. Highlights and trends discussed.

Short Analysis - Dividend Score: 3

We're running CME Group (CME) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

Summary of analysis for CME Group's dividend policy based on 8 criteria: 1. **Dividend Yield**: CME Group's dividend yield (4.5821%) is higher than the industry average (2.13%) which is favorable, but it has historical volatility. 2. **Dividend Growth Rate**: The average growth rate is strong at 33.7% over 20 years, despite some fluctuating years. 3. **Payout Ratio**: The average payout ratio (74.63%) is higher than recommended (65%), raising sustainability concerns. 4. **Earnings Coverage**: Dividends are generally well-covered by earnings, but with some periods of instability. 5. **Cash Flow Coverage**: Dividends are well-covered by cash flow, though occasional volatility exists. 6. **Dividend Stability**: Dividends have remained stable without drops over 20% in the last 20 years, indicating reliability. 7. **Long-term Dividend Payment**: CME has paid consistent dividends for 20 years, not meeting the 25+ years criterion. 8. **Stock Repurchases**: Limited stock buyback activities, reflecting minimal impact on share count over 20 years.

Insights for Value Investors Seeking Stable Income

Based on the analysis, CME Group demonstrates a strong dividend yield and growth rate, but there are concerns about the sustainability of its high payout ratio and periods of instability in earnings coverage. The fact they've maintained stable dividends and have adequate cash flow coverage is positive. Despite failing the stock repurchase criterion and not having a 25+ year dividend history, these may be minor drawbacks for some investors. Overall, CME Group could be worth further investigation, especially for income-focused investors looking for high yields and growth, but caution is recommended due to potential volatility.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend Yield refers to the financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

CME Group's current dividend yield of 4.5821% is significantly higher than the industry average of 2.13%, indicating a stronger return to shareholders through dividends. Historically, CME's dividend yield has been volatile, peaking at 7.2864% in 2012 and hitting lows below 1% in earlier years. When comparing CME's trend to the industry's more stable trend, CME has consistently outperformed in recent years. This trend is favorable for income-seeking investors. However, it's important to note that periods of high yield often correspond with declining stock prices, as seen with CME's stock price fluctuations. Overall, CME's above-average dividend yield signals a strong commitment to returning capital to shareholders but warrants a careful look at the underlying stock price movements.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate indicates how much a company's dividend payments have increased over a given period, generally reflecting its financial health and profitability. A growth rate over 5% is considered robust, suggesting that a company effectively utilizes reinvested profits and generates increasing returns for shareholders over time.

CME Group's dividend history exhibits considerable fluctuations over the past 20 years, with an average dividend growth rate sitting around 33.7%. Despite some instances of negative growth years (e.g., 2009, 2014, 2018), the overall trend points to a positive dividend development. Notably, the higher growth rates, such as 2008's 179.1% and 2012's 229.6%, substantially boost the average, underscoring the company's financial strength and commitment to rewarding shareholders. Thus, CME Group demonstrates a strong historical dividend growth rate, with an average far surpassing the 5% threshold, marking it as favorable for income-focused investors.

Average annual Payout Ratio lower than 65% in the last 20 years?

The average payout ratio is a key indicator of a company's ability to sustain its dividend payments. A payout ratio over 65% may suggest overextension.

The compounded average payout ratio for CME Group over the past two decades is approximately 74.63%. This figure is notably above the 65% threshold, signaling potential sustainability concerns. High payout ratios, especially those exceeding 100% as observed in numerous recent years, indicate that the company might be paying more in dividends than it earns in net income. This practice is unsustainable in the long term unless balanced by exceptional growth metrics or reserve funds. Therefore, while CME Group maintains a prolific dividend history, there is a red flag when it comes to the prudent management of its payout ratios.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings.

An important measure for dividend sustainability is the Earnings Per Share (EPS) vs. Dividend Per Share (DPS). By comparing these, we can determine if the company's profits are sufficient to cover dividends. A ratio of 1 indicates that the dividends are fully covered by earnings, while a ratio below 1 may reflect potential issues in maintaining dividend payouts. In the case of CME Group, the numbers from 2003 to 2023 reflect a mixed trend. For instance, the EPS far exceeds the DPS in 2003 and 2004, with coverage ratios of 0.17 and 0.16 respectively. These lower ratios in the early years suggest potential risk in dividend coverage. As we move to later years like 2008 and 2009, we see significant coverage improvements, but overall better coverage isn't evident until recent years like 2021 and 2023, where the coverage ratios climb back to healthy levels above 1. The trend appears positive overall, moving from volatile ratios to more stable and healthy levels reaching nearly the 1:1 ratio. It's important to note that extreme fluctuations, such as 1.368 in 2012 and 1.506 in 2013 followed by lows like 0.51 in 2017, indicate periods of instability. In summary, while the current trend shows strong earnings coverage for dividends, the past fluctuations suggest attentive monitoring is crucial for investors.

Dividends Well Covered by Cash Flow?

Dividends being well-covered by cash flow means that the company generates enough free cash flow to comfortably pay its dividends. This is a critical measure of dividend sustainability and overall financial health.

CME Group's historical data indicates that its free cash flow has generally been more than sufficient to cover its dividend payments. Particularly notable years include 2012, 2014, and 2017, when the coverage ratios exceeded 1, indicating abundant free cash flow relative to dividends paid. This trend suggests sound management of both earnings and dividends, but fluctuation in certain years, such as 2008 and 2011, highlights potential volatility. Overall, the trend is positive and indicates a strong capability to maintain and possibly grow dividend payouts.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

Evaluating the dividend per share for CME Group over the past 20 years reveals consistent growth without any drops exceeding 20%. The year-by-year dividends were: 0.126, 0.208, 0.368, 0.504, 0.688, 1.92, 0.92, 0.92, 1.12, 3.692, 4.4, 3.88, 4.9, 5.65, 6.14, 4.55, 5.5, 5.9, 6.85, 8.5, 9.65. None of these values indicate a substantial decline, thus demonstrating strong performance and reliability. This trend is undoubtedly positive for income-seeking investors as it exemplifies stable and potentially increasing income streams over the long term.

Dividends Paid for Over 25 Years?

Criterion 6 assesses whether a company has a history of paying dividends consistently for over 25 years, indicating financial stability and commitment to returning value to shareholders.

CME Group (CME) has been paying dividends since 2003. This is evidenced by the first recorded dividend payment of $0.126 per share that year. Since then, the company has demonstrated a robust and generally increasing trend in dividend payments, with a few fluctuations over the years. For example, dividends increased from $0.126 in 2003 to $9.65 in 2023.

Reliable Stock Repurchases Over the Past 20 Years?

Stock repurchases refer to the company's buyback of its own shares from the marketplace. This criterion is significant as it can indicate management's confidence in the company's future prospects and also serves to increase earnings per share by reducing the number of shares outstanding.

Analyzing the data for CME Group (CME) from 2003 to 2023, the number of shares outstanding increased significantly from 169,674,790 shares in 2003 to 359,023,000 shares in 2023. The increase in the number of shares over the past two decades suggests limited stock repurchase activities, apart from a few years, notably 2010 and 2012, where repurchase activities are pinpointed. The average stock repurchase ratio over the last 20 years is a mere 4.1639%, reflecting a minimal impact on the overall share count. This is not particularly indicative of a strong buyback program, potentially reflecting a strategy focused on growth and expansion rather than aggressive share repurchases. Thus, the trend appears weak in terms of stock buybacks, which might concern dividend-focused investors viewing buybacks as supplementary to dividend payments.