Franklin D. Roosevelt is famous for his saying: “The only thing we have to fear is fear itself.”
Although it was a rallying cry in the 1930s for America, it can be applied to almost anything in life.
I’d say it’s particularly apt for investing.
A lot of people fear investing, thinking the stock market is “risky” or a “casino”.
But that fear is actually the thing to fear, as it holds people back from being able to take advantage of the incredible power of compounding over the long term.
If you can compound at just 7%/year (which is not difficult), you double your money every 10 years.
Just think about that; if you’re young, you could have six or seven doubling periods to go.
That’s a lot of money being left on the table for those who let fear win.
And one could do a lot better than 7% with dividend growth investing – a long-term investment strategy where one buys and holds shares in high-quality businesses paying out reliable, rising dividends to shareholders.
These are some of the best businesses in the world, and growing dividends serve as the “proof in the profit pudding”.
You can see what I mean by taking a look at the Dividend Champions, Contenders, and Challengers list – a detailed data set on hundreds of US-listed stocks which have raised dividends each year for at least the last five consecutive years.
Because these are some of the world’s best businesses, they’re often amazing generators of wealth and passive income over time.
I say that as someone who has personally experienced this, reaching financial independence and retiring in my early 30s.
Although a lot of it is thanks to the dividend growth investing strategy, you can read all about how I was able to retire at such a young age in my Early Retirement Blueprint.
I now control the FIRE Fund.
That’s my real-money portfolio, and it generates enough five-figure passive dividend income for me to live off of.
As far as great businesses can take you, valuation at the time of investment will have a lot to say about your ultimate success with any investment.
And that’s because price only represents what you pay, but value represents what you end up getting.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
There’s certainly nothing fearful about building a fortune and achieving financial independence, which is possible by routinely buying undervalued high-quality dividend growth stocks.
Now, the preceding section does assume one already understands the ins and outs of valuation.
If you need help with that, be sure to give Lesson 11: Valuation a read.
Written by fellow contributor Dave Van Knapp, it lays out what valuation is, why it’s important, and how to go about using a simple set of tools to estimate the value of almost any dividend growth stock you’ll run across.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
S&P Global Inc. (SPGI)
S&P Global Inc. (SPGI) is a US-based leading provider of credit ratings, benchmarks, analytics, and workflow solutions to various markets worldwide.
Founded in 1860, S&P Global is now a $133 billion (by market cap) financial markets behemoth that employs more than 40,000 people.
Approximately 60% of the company’s revenue is derived from the US.
The company reports results across five segments: Market Intelligence, 32% of FY 2024 revenue; Ratings, 30%; Commodity Insights, 15%; Mobility (which is being spun out), 11%; and Indices, 11%.
I view S&P Global as three wonderful businesses all in one: S&P Global has a scaled-up intelligence business with high-value proprietary data; it controls the largest ratings agency in the world; and it owns an irreplaceable indices business with various lionized S&P products under its umbrella (such as the venerable S&P 500, the global gold standard).
Each business on its own would be very powerful and highly appealing for almost any long-term investor, but all three being being combined into one package is what makes S&P Global one of the most unique and compelling long-term investment opportunities out there.
In data-driven markets where information is prized for insight, S&P Global has a treasure trove of proprietary data at unparalleled scale.
Since companies issuing public debt are practically required to have a rating, and since there are only two global players providing these ratings at trusted scale, S&P Global operates within a comfortable duopoly (with S&P Global estimated as commanding a market share of nearly 50%, and its only other major competitor commanding an estimated 30%).
And its indices business has numerous recurring revenue drivers all on its own, including subscription fees, asset-linked fees, and transaction royalties – and all of these are firmly embedded within global capital markets in a such a way that is almost impossible to displace.
These are three formidable businesses on a standalone basis, but S&P Global has combined them into a complementary flywheel.
In a world where cycles are shorter and disruption is happening faster, the kind of durability that S&P Global possesses by combining three almost-unassailable businesses under one roof means it’s hard to imagine a world decades into the future in which S&P Global is not larger, more profitable, and more successful than it is today.
To the contrary, I believe it’ll continue to pull its many levers to generate substantial revenue, profit, and dividend growth over the decades ahead.
Dividend Growth, Growth Rate, Payout Ratio and Yield
To that point, S&P Global has already increased its dividend for 53 consecutive years.
Incredible.
That’s one of the longest dividend growth streaks in existence.
It easily qualifies S&P Global for its status as a vaunted Dividend Aristocrat and Dividend King.
If anything, this is the Dividend Aristocrat (it’s this company’s index, after all).
Its 10-year dividend growth rate of 11.3% is very solid, especially considering how that had come after 40 prior years of dividend growth already.
However, more recent dividend raises over the last few years have been much more modest as a result of acquisitions designed to strengthen the company’s grip over global markets (which was already strong before).
A payout ratio of 28.2% shows us an extremely healthy dividend poised to grow at a high rate over the coming years.
This foundation is further reinforced by the business’s high rate of growth.
Pairing such a low payout ratio with a business growing at a very rapid rate are dual tailwinds positioning shareholders for huge dividend growth over the years ahead.
If there’s a drawback here, it’s probably the stock’s yield of 1%.
That’s not exactly a mouth-watering yield, but it is 20 basis points higher than its own five-year average.
There’s more immediate yield than usual to be had here, along with a nice setup for dividend growth now that S&P Global is on the other side of some heavy acquisitive activity.
This is looking like an opportune moment to invest in a king among kings.
Revenue and Earnings Growth
As opportune as it may be, though, we’re largely relying on past data.
However, investors must constantly be considering the future, as the capital of today ultimately gets risked for the rewards of tomorrow.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be taken into account during the valuation process.
I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this manner should give us the ability to roughly estimate where the business may be going from here.
S&P Global moved its revenue from $5.7 billion in FY 2016 to $15.3 billion in FY 2025.
That’s a compound annual growth rate of 11.6%.
Excellent top-line growth, although a meaningful jump in revenue occurred after S&P Global acquired IHS Markit in 2020 for $44 billion in an effort to significantly expand its data, increase recurring data, and open up cross-selling opportunities.
Meanwhile, earnings per share grew from $7.94 to $17.83 (adjusted) over this period, which is a CAGR of 9.4%.
The IHS Markit acquisition muddies the waters, making a straight-line comparison somewhat inaccurate.
If we zoom in and look at the most recent quarter (Q4 FY 2025), which is more current and relevant, S&P Global powered ahead with 14% YOY adjusted EPS growth.
That’s a bit more like it.
Looking ahead, CFRA is projecting a 12% CAGR for S&P Global’s EPS over the next three years.
That includes S&P Global’s upcoming spin-off of its Mobility unit (one of its smallest), which focuses on automotive intelligence.
CFRA highlights S&P Global’s dominant position in credit ratings, its standing as the benchmark in indices, and its proprietary data.
S&P Global has unrivaled brand power in not one but two industries (ratings and indices).
This is the index company. This is the ratings agency. Its data is the data.
In my view, its three main businesses are nearly unassailable.
Of course, there is the elephant in the room: AI.
While CFRA concedes that questions remain regarding just how competitive and valuable proprietary data will be in an age of AI, S&P Global is busy embedding AI in products and partnering with LLMs in order to fortify the business.
How much of a friend or foe AI will be remains to be determined, but I can’t imagine we’re going to live in a world in which all IP is just scraped freely by third-party apps.
And there’s much here that AI simply cannot do.
Nobody is going to just “vibe code” the S&P 500.
If we assume that CFRA is in the ballpark with its 12% number, that positions S&P Global for mid-teens dividend growth over the coming years by virtue of the payout ratio being so low.
Again, the 1% yield isn’t much, but those who appreciate high-quality compounders should like what they see.
S&P Global’s stock has a 10-year CAGR (including reinvested dividends) of 17.7% – even after the recent drawdown – so it’s clearly been (and appears to remain) a high-caliber long-term investment for those willing to accept a low starting yield.
Financial Position
Moving over to the balance sheet, S&P Global has a great financial position.
The long-term debt/equity ratio is 0.3, while the interest coverage ratio is nearly 20.
Its credit ratings (by the other agencies) are well into investment-grade territory: A3, Moody’s; A-, Fitch.
While the balance sheet isn’t quite the indomitable fortress it was a decade ago, it’s still a pillar of strength.
Profitability is robust.
Return on equity has averaged 226.2% over the last five years, while net margin has averaged 29%.
As impressive as these metrics are, they were even better before the IHS Markit acquisition.
ROIC was reliably over 40% before that acquisition, for example, which is otherworldly.
S&P Global had some room for a mistake here, so time will tell how much post-AI erosion occurs.
The good news is that the indices and ratings businesses are so good that any possible shareholder value destruction can be absorbed over time.
Overall, from what I see, S&P Global is one of the best companies on the planet.
And with economies of scale, network effects, barriers to entry, “sticky” products already firmly embedded into global markets, IP, and R&D, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
S&P Global is somewhat insulated from competition, as it operates (or even dominates) within oligopolistic markets.
In addition, because of the regulatory hurdles involves in the global financial markets, along with the way in which S&P Global is so entrenched already, regulation is, arguably, as much of a shield as it is a risk for S&P Global.
The company’s massive trove of data could become less useful and valuable as AI-powered research becomes ubiquitous, although AI is trained on data and proprietary data/IP can’t simply be stolen.
AI is currently considered to be a general, broader risk to this entire industry, but it’s unclear exactly what AI can do to dislodge embedded global indices and/or ratings agencies.
IHS Markit was S&P Global’s largest acquisition ever, and there are unanswered questions regarding just how synergistic and beneficial the deal was, along with whether or not the price paid was appropriate.
The number of public companies has been decreasing for years, reducing opportunities for listings and ratings, but deal flow appears to be picking up after a lull (which increases the opportunity set for ratings).
Being a global enterprise, S&P Global does face geopolitics and currency exchange rates; however, its lack of physical infrastructure and the embedded nature of its financial products protects the firm from most geopolitical storms.
Other than the IHS Markit questions, the risk profile of S&P Global does not strike me as high.
But with the stock in a severe drawdown – dropping by nearly 25% YTD alone – there seems to be a lot of consternation and worry now being priced into shares…
Valuation
The stock now has a P/E ratio of 21.9, based on adjusted EPS.
That is nearly half of its own five-year average P/E ratio of 38.5.
Its cash flow multiple of 19.6, which is not demanding at all even in isolation, is far lower than its own five-year average of 30.7.
And the yield, as noted earlier, is higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate, a 10-year dividend growth rate of 15%, and a long-term dividend growth rate of 8%.
The model includes a near-term acceleration in dividend growth relative to the proven 10-year dividend growth rate, but that 10-year rate has been negatively impacted by unusually small dividend raises over the last several years.
If we go back to before the IHS Markit acquisition, S&P Global was handing out 20% dividend raises like candy.
I’m basically assuming a return to the status quo as it pertains to long-run dividend growth out of S&P Global.
With the major acquisition already integrated, a low-double-digit EPS growth rate being projected over the next few years, and the payout ratio being as low as it is, S&P Global has plenty of headroom to deliver a mid-teens type of dividend growth rate from here.
Of course, I wouldn’t expect that kind of growth to persist forever, and the model does allow for a natural slowdown into a high-single-digit level, which I think is appropriate for the quality and growth that S&P Global exudes.
The DDM analysis gives me a fair value of $376.75.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
While this has consistently been a very expensive stock, I think it’s now at least in the realm of fairness after an epic drawdown.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates SPGI as a 5-star stock, with a fair value estimate of $570.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates SPGI as a 3-star “HOLD” with a 12-month target price of $465.00.
I came out low, surprisingly. Averaging the three numbers out gives us a final valuation of $470.58, which would indicate the stock is possibly 20% undervalued.
Bottom line: S&P Global Inc. (SPGI) is a world-class company made up of three formidable businesses which have been complementarily combined into a fortress that’s nearly unassailable. The fundamentals are among the best I’ve seen. It’s the Dividend Aristocrat. With a market-like yield, double-digit dividend growth, a very low payout ratio, more than 50 consecutive years of dividend increases, and the potential that shares are 20% undervalued, long-term dividend growth investors would be wise to seriously consider this Dividend King now.
-Jason Fieber
Note from D&I: How safe is SPGI’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 99. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, SPGI’s dividend appears Very Safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I’m long SPGI.
