The company — which offers a wide variety of marketplace services for various tradable financial assets — was founded in 1973, produces about $3.6 billion in annual revenue, and trades with a market cap of just over $13 billion.
CBOE reported second-quarter earnings on July 29th, 2022 and results were largely in line with expectations. Total revenue was a new record at $424 million, up 21% year-over-year, and beating estimates fractionally. Earnings-per-share rose from $1.38 to $1.67 year-over-year but missed estimates by two cents.
Growth in Q2 was driven by strong trading volumes in derivatives, as well as an increased demand for data and access solutions. Derivatives revenue soared 30% from the year-ago period, while Data and Access Solutions saw 20% growth.
The company updated guidance for this year to 9% to 11% total revenue growth, up sharply from the prior range of 5% to 7%. This growth is expected to be led by Data and Access Solutions at +10% to +13%. Following second quarter results, we now expect $6.25 in earnings-per-share for this year, which would represent a new record.
CBOE has a respectable streak of dividend growth, growing its dividend by an average compound rate of over 13% for the last decade. Still, its payout ratio is just 32% of this year’s expected earnings. That’s because the company was able to grow earnings at high rates during this period as well, which is something we expect to continue for the foreseeable future.
CBOE could experience a sizable decline in earnings and still raise its dividend, so from a safety perspective, we rate it highly. We note that trading volumes may decline during prolonged bear markets, which increases the company’s recession vulnerability. Still, we have no concerns about the company’s dividend safety at the moment.
CBOE has averaged double-digit growth in earnings in the past decade, but we’re looking for a more conservative 6%. This could be driven by the company’s ability to grow the top line through both organic gains in volume and acquisitions. The company also buys back a small number of shares, although we expect that to produce a minimal amount of earnings-per-share growth.
The stock is trading for about 19 times this year’s earnings, which is below our estimate of fair value at 25 times earnings. That implies we could see a ~5% tailwind to total returns annually from the valuation. In concert with the 1.7% dividend yield and 6% earnings growth, we forecast better than 12% total annual returns in the coming years.
With the valuation, strong growth prospects, and the company’s history as a first-rate dividend growth stock, we are optimistic about this stock.