CME Group (CME) had $1.8 billion in cash and marketable securities and $2.2 billion in long-term debt as of December 31, 2015. The company has returned more than $5.6 billion to shareholders in the form of dividends since the implementation of the variable dividend policy in early 2012. In 2015, CME declared dividends of $1.6 billion, including the annual variable dividend for 2015 of $977 million, which was paid in January 2016. This translates into a dividend yield of 5.5% per year. Let’s compare this to its peers:
Together, these companies form 0.35% of the SPDR S&P 500 ETF (SPY).
CME stock has been historically valued at a premium compared to its peers. CME is currently valued at 20.4x on a one-year forward price-to-earnings basis, while its peers trade at an average of 18.6x. The company commands a premium, mainly due to higher volumes in interest rates, foreign exchange, and energy trades. CME has six asset classes, all of which have benchmarks. The exchange will benefit from offerings of complementary asset classes.
In 4Q15, CME’s valuation gap declined due to lower average daily volumes and declining revenues. The company saw lower revenues due to lower volatility in interest rates, which forms 46% of its total volumes. However, in January 2016, CME has seen strong growth in volumes across the asset classes. The company has seen an average daily volume of 18.2 million in contracts compared to 15.6 million in the prior year.
CME expects rates and energy asset classes to grow at a faster pace in the upcoming quarters. The company is also making progress in the OTC (over-the-counter) markets and portfolio managing for clients. CME is losing the battle to LCH.Clearnet, backed by the London Stock Exchange, in the swaps clearing business. The company’s market share declined to 30% in 2015 compared to 38% in the previous quarter, mainly due to higher pricing.
The overall industry has an outlook for higher volumes in 1Q16. CME is targeting increased penetration of global clients, attractive flow from the swaps business through clearing and exchange-traded alternatives, and driving options growth across the platform. This should help the company elevate its volume in the current year.