CME Group: Profits at the Merc

10/11/2017 5:00 am EST


Chloe Jensen

Chief Analyst, Cabot Dividend Investor

CME Group (CME) owns and operates exchanges where options, futures and derivatives are traded. The company’s namesake is the Chicago Mercantile Exchange, or “the Merc,” says Chloe Lutts Jensen, editor of Cabot Dividend Investor.

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 In 2007, the CME merged with the Chicago Board of Trade, or CBOT, the primary options exchange. One year later, CME consolidated its control of commodity futures trading by acquiring the New York Mercantile and Commodity Exchanges (NYMEX and COMEX).

And in 2010, CME Group bought the Dow Jones Indexes, acquiring control of the Dow Industrials. The world’s largest derivative exchange, the CME offers contracts based on interest rates, stocks, currencies, commodity prices and more.

In other words, a large percentage of the financial activity you read about on any given day — from options trades to changes in interest rate expectations to moves in oil price futures — occurs on one of CME’s 24-hour exchanges.

Commodity futures were originally designed to allow commodity producers like farmers and miners to hedge against price changes by transferring unwanted price risk to speculators. Today, futures contracts are still widely used for hedging in many industries. For example, most airlines use hedges to limit their exposure to changes in fuel prices.


But futures—and similar derivative products—have sprung up in lots of new areas as well. And derivatives are now also widely used purely as financial instruments, mostly by institutional investors.

This steady expansion of the derivatives market has fueled steady growth at CME Group. And CME continues to introduce new types of derivatives regularly. At the end of 2016, the company announced that is it working on a blockchain-based gold trading platform.

CME Group pays regular quarterly dividends of 66 cents, for a current yield of just about 2.0%. However, the company also distributes excess cash as a special dividend at the end of each year. Last year’s special dividend of $3.25 more than doubled the stock’s annual yield.

CME has paid these special dividends in each of the last five years. The company has also increased its regular dividend for six years in a row.

CME trades at a current P/E of 27 and a forward P/E of 25. I’ll add CME to the Dividend Growth Tier of our portfolio. Investors interested in steady dividend growth, capital gains and special dividends can do the same.

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