MSCI

MSCI: Wide Moat Index Manager

Gist of MSCI

MSCI Inc (MSCI), the global financial analytics company behind famous indexes like the MSCI World Index, introduced a dividend in 2014 and has continued to raise it ever since. Besides the growing dividend MSCI arguably has a wide moat.

Is it worth considering as an addition to your dividend growth portfolio?

Hello fellow Dividend Growth Investors, as a guest on dividendpower.org I would like to introduce myself. I am Christoph, a 30-year-old German expat living in the great white north – Canada.

Ever since starting my investment journey in 2016 I’ve been fascinated with the strategy of Dividend Growth Investing and have been using cash flow generated from dividends to build my portfolio and achieve my desired asset allocation. My ultimate goal is to build a stream of income substantial enough to eventually support my family without the 9-5 grind. 

Today I would like to introduce you to one of the companies I’ve analyzed recently to evaluate whether it’s worth a spot in your or my dividend growth portfolio.


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Initial Screening

MSCI (originated from Morgan Stanley Capital International) is a global benchmark, index and analytics service provider in the financial sector. Founded in 1968, the company has continuously focused on indexes covering the global stock market. Originally known as Capital Investments, in 1986 Morgan Stanley acquired the firm, establishing MSCI, and upon another acquisition in 2004, established MSCI Barra. Just before the financial crisis, in 2007 the company was spun off in an IPO trading under the ticker MSCI on the NYSE and went fully public in 2009. Total revenue was about $1,658 million in the TTM.

MSCI’s peer group and competitors consist of other big index and data providers such as Nasdaq Inc. (NASDAQ:NDAQ), BlackRock Inc. (NYSE: BLK), and S&P Global Inc. (NYSE: SPGI).

MSCI_infographic_dividendpower
MSCI: Wide Moat Index Manager

MSCI’s Business Model

Although MSCI is offering a multitude of products there are two operating segments which stand out from a revenue point of view. 

First off, the Indexes segment still builds the core of MSCI’s business. Each day the company calculates over 225,000 indexes, enabling individual investors and financial institutions to access market data from around the globe. There is a total of $12.1 trillion USD invested in indexes under the MSCI brand. 

Adding to their wide range of index products, MSCI also operates the Analytics segment for institutional investors enabling them to make more educated decisions based on market, credit, liquidity and risk & return data. The remaining two segments, ESG and Real Estate, only generate about 9% of total revenue.

Below you can find an overview of the MSCIs recurring revenue model and the global client base from the MSCI Inc. Investor Presentation 2020:

MSCI Total Revenue
Source: MSCI Investor Presentation 2020

This graphic illustrates MSCI’s global business operations while showcasing an amazing 74% of recurring revenues from subscriptions. Pairing the subscription model with their blue-chip customer base which are less likely to switch providers, the company is in a great shape for future operation and growth.  

MSCI’s Dividend Growth and Sustainability

MSCI’s current dividend yield as of 01/10/2021 is 0.69%, a low starting point and well below their 5-year average yield of 1.01%. 

The following section will cover some history on and judge the sustainability of MSCI’s dividend by examining the payout ratio as well as its growth to determine whether the business makes a compelling case for dividend growth investors. 

Dividend History & Growth

MSCI introduced a quarterly dividend with payouts in February, May, August and October in 2014. Since then, shareholders can look back on a 7-year dividend growth streak, awarding the company the status of a US Dividend Challenger (Companies with Dividend Growth streaks between 5 and 9 years). 

Reflecting on the years since 2015, the dividend per share has been increased by over 265%, with the latest dividend increase announced on Feb 20, 2020. We opted out of calculating the increase since 2014, as they only paid one dividend in the first year and the comparison could be misleading.

You may think that the high dividend growth rate would lead to a high yield but shares of MSCI equally appreciated from $53.82 USD to $452.68 USD per share over the same time period, resulting in an increase of close to 750%.

From a dividend growth investors point of view, you will have to ask yourself about your investment horizon, as it will take decades for your position to generate a meaningful yield. On the flipside you will notice that the dynamic in stock price makes for a very compelling argument if you’re focussing on capital appreciation as well as general growth. 

Payout Ratio

Ever since introducing a dividend in 2014, MSCI’s dividend payout ratio has hovered between 36% and 42%. From a payout ratio standpoint alone I would consider the dividend as safe especially considering the safe recurring revenue streams. There is likely little chance at the moment the dividend will be cut or suspended.

Financial Snapshot

Using the Piotroski F-Score to measure MSCI’s current financial health, we see it secures an 8 in the 0 to 9 ranking which signals a very healthy financial position when comparing year-over-year results. 

Over the last 5 years earnings and revenue of MSCI have been steadily increasing while the company was also able to raise the profit margin from 20% to 34%, but the big red flag, at least from my point of view, is debt.

Financial engineering in the form of share buybacks have left the company with a negative shareholder equity, meaning liabilities exceed the company’s assets leaving the company at a -870% Debt to Equity ratio.

That being said, MSCI’s debt is still well covered by their operating cash flows, and interest payments are covered considering a 5.7x coverage-rate by EBIT.

Investment Case

In the following section, we will dive into the company’s moat as well as bull and bear cases to outline which headwinds the company might face while providing insight into their strategy and growth opportunities.

MSCI Wide Moat

MSCI offers a wide economic moat built on their leading competitive position for global index licensing. The brand name can be recognized by individual investors and institutions alike. The fact that nearly every investor I’ve ever talked to has heard of the MSCI World ETF is amazing and the brand has become a catalyst for decisions on which ETFs use to access markets and regions otherwise nearly inaccessible for investors (depending on their broker).

Furthermore, while the switching costs for ETFs have become rather small thanks to discount brokers, MSCIs data and analytics subscriptions offer a way higher barrier for customers wanting to switch. Products in this space vary widely and come with data migration burdens leading to high switching costs especially for bigger institutions.

The Bull Case

The rising popularity of index investing and the overall trend towards more passive investments in the form of ETFs greatly benefits MSCI. It is to be expected that cash flows will continue to move from actively managed portfolios to passive investments tracking indexes.

Furthermore, analytics and data will never go out of fashion when it comes to making decisions for asset allocations. Whether it’s securities or tools analyzing the real estate market, MSCI is well positioned for years to come.

The Bear Case

The strongest bear case is that it has to be seen whether a share price raised by buybacks can reward investors initiating and adding to positions at the current levels. The company may offer a healthy growth and stable business but at these valuation levels there is a chance for a “lost decade” for investors. 

Conclusion

At a valuation of 67.58 P/E MSCI is currently not a buy for me. The stock has outperformed the US Financial sector by a longshot over the last 5 years but at this point in time Price/Earnings and Price-Earnings-Growth or ‘PEG’ and over valuations are higher than ever before in the last decade. 

While the business is one of the leading indexing / benchmarking providers around the world and MSCI has a wide moat. The company will continue to grow it may just not grow as much as the current share price suggests. I would turn to further analyze MSCI’s peers which are currently trading at much lower valuations.

As always, I recommend potential investors browse through the documents found on MSCI’s investor relations page as a great start for their due diligence.

Thank you for making it through my stock analysis of wide moat MSCI Inc. Do you hold a position in the Index provider? I invite you to share any feedback and experiences with the company!

Disclosure: None. This article was originally written by Just Dividends.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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