Moody’s Corporation: The More It Drops The Better It Looks

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Moody’s is a Dividend Contender with 12 consecutive years of dividend growth. Shares currently yield 0.92%.

The company is the second largest rating agency in terms of ongoing ratings.

MCO shares have pulled back 25% from their October 2021 high and the valuation is beginning to look attractive.

PeterPhoto/iStock Unreleased via Getty Images Moody’s Corporation ( MCO ) is a business I’ve had my eye on for quite some time, but could never wrap my head around the valuation. With the share price off 25% since the late October high, and in the 4th deepest drawdown of the last decade, I wanted to take another look at this company to see if now could be the time to add shares to my portfolio. Data by YCharts The 3 largest players in the credit ratings space are Moody’s, S&P Global, and Fitch. As we can see S&P is by far the leader in terms of ongoing ratings with ~50% market share while Moody’s is second with ~32% market share. Fitch comes in around 13%. Combined those 3 account for ~95% of the ongoing ratings. FY 2020 OCG Annual Report on NRSROs Source

The top players don’t necessarily fiercely compete with each other since nearly all major issuances will be rated by 2 of the big 3.

Their client businesses aren’t necessarily tied to Moody’s; however, they will receive lower interest rates on debt offerings when they have a rating from the one of the major agencies and the lower debt service payments far outweighs the fees paid to Moody’s.

Moody’s is organized in two operating segments: (1) Moody’s Investors Service MIS – which provides initial and ongoing ratings on debt offerings, and (2) Moody’s Analytics MA – which provides portfolio modeling, data, and risk managements capabilities to institutional investors.

MIS is expected to grow slower in the low-to-mid single digit range, but carries higher margins. Meanwhile, the MA segment is expected to show faster topline growth but carries lower margins. Dividend History

As a dividend growth investor I prefer that the businesses that I invest in are mature enough that they are able to generate more cash through their operations than the business needs such that that can afford to both pay and increase their dividend over time. Moody’s Corporation Dividend History (Moody’s Investor Relations) Moody’s initiated a dividend in 2000 and then promptly froze it until 2004. They then proceeded with a solid 5-year growth streak until the great financial crisis/housing bubble struck where the dividend was then frozen again in 2009. However, the important thing to note is that the dividend was never cut during either of those periods. Dividend growth resumed in 2010 and Moody’s is now up to a 12 year streak of rising dividends giving them the title of Dividend Contender.

During their current dividend growth streak year over year dividend growth has ranged from 2.7% to 40.6% with an average of 16.5% and a median of 13.6%.

Dating back to 2000 there’s been 18 rolling 5-year periods with Moody’s annualized dividend growth ranging from 10.5% to 34.8% with an average of 19.0% and a median of 17.6%.

Over that same time frame there’s been 13 rolling 10-year periods with annualized dividend growth spanning 15.9% to 25.9% with an average of 18.9% and a median of 18.1%.

The rolling 1-, 3-, 5-, and 10-year annualized dividend growth rates from Moody’s since 2000 can be found in the following table. Year Annual Dividend 1 Year DGR 3 Year DGR 5 Year DGR 10 Year DGR 2000 $0.09 2001 $0.09 0.00% 2002 $0.09 0.00% 2003 $0.09 0.00% 0.00% 2004 $0.15 66.67% 18.56% 2005 $0.20 35.00% 31.04% 17.61% 2006 $0.28 38.27% 45.98% 25.48% 2007 $0.32 14.29% 28.73% 28.88% 2008 $0.40 25.00% 25.47% 34.76% 2009 $0.40 0.00% 12.62% 21.67% 2010 $0.42 5.00% 9.49% 15.71% 16.65% 2011 $0.54 27.38% 10.18% 13.83% 19.51% 2012 $0.64 19.63% 16.96% 14.87% 21.67% 2013 $0.90 40.63% 28.92% 17.61% 25.89% 2014 $1.12 24.44% 27.92% 22.87% 22.27% 2015 $1.36 21.43% 28.56% 26.49% 20.98% 2016 $1.48 8.82% 18.03% 22.57% 18.12% 2017 $1.52 2.70% 10.72% 18.89% 16.86% 2018 $1.76 15.79% 8.97% 14.35% 15.97% 2019 $2.00 13.64% 10.56% 12.30% 17.46% 2020 $2.24 12.00% 13.80% 10.49% 18.22% 2021 $2.48 10.71% 12.11% 10.88% 16.58% 2022*est $2.80 12.90% 11.87% 13.00% 15.90% Source: Author; Data Source: Moody’s Corporation Investor Relations

When implementing a dividend growth investment strategy it’s important to make sure the dividend is well covered by earnings or cash flow to help insulate yourself from the risk of a dividend cut. All else being equal the […]

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