Top Picks 2018: CME Group (CME)

01/01/2018 5:00 am EST


Chloe Jensen

Chief Analyst, Cabot Dividend Investor

CME Group (CME) — my aggressive idea for 2018 — has been in the news recently because the company just started offering bitcoin futures, allowing speculators to bet on the cryptocurrency’s price without owning it, explains Chloe Lutts Jensen, editor of Cabot Dividend Investor

But we added the stock to our portfolio back in October for longer-term growth and its track record of dividend increases and large special dividends.

CME Group owns and operates options, futures and derivatives exchanges, including the world’s largest derivatives exchange, the Chicago Mercantile Exchange, where investors can trade contracts based on interest rates, stocks, currencies, commodity prices and more.

Commodity futures were originally designed to allow commodity producers to hedge against price changes, but are now also widely used for speculation, mostly by institutional investors. This steady expansion of the derivatives market has fueled steady growth at CME Group.

Revenues have increased in each of the last five years, by an average of 4% per year. Net income has also increased every year, by an average of 11% per year. The company has beaten estimates in each of the last four quarters.

CME Group not only pays regular quarterly dividends, the company also distributes excess cash as a special dividend at the end of each year. This year’s special dividend of $3.50 will more than double the stock’s annual yield. The company has also increased their regular dividend for six years in a row while also bringing their payout ratio down from a high of 66% in 2012 to 51% today.

That helps earn CME a solid Dividend Safety Rating of 7.6 from IRIS, my dividend stock rating system. And the company’s annual dividend increases of around 6% and high-single-digit earnings growth expectations earn the stock a Dividend Growth Rating of 6.0 (both ratings out of 10).

CME also boasts a great chart. Its current uptrend started in June 2016, when it broke out of a long base to the upside. The stock rose 40% over the next 17 months, before surging to new all-time highs amid December’s bitcoin mania. While the latest surge will likely be followed by a period of consolidation, longer-term, I expect excellent total returns.

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