CME Group (NASDAQ:CME): The Next Great Dividend Stock

With a forward dividend yield of 2.3%, it might not look like it at first glance, but CME Group (NASDAQ:CME) is making a case for itself as the next great dividend stock. 

I’m bullish on CME Group based on its burgeoning track record as a dividend growth stock and its propensity of rewarding shareholders with large special dividend payments year after year (which don’t show up in the stock’s forward dividend yield, although they show up on a trailing basis). Plus, the company has a strong business model and trades at a below-market-average multiple. 

A Strong Moat 

Formerly known as the Chicago Mercantile Exchange, CME Group traces its roots all the way back to 1898, but today, the company employs high-tech market infrastructure to facilitate the world’s leading derivatives marketplace. 

CME offers a wide range of futures and options products for risk management, including equity indexes, interest rates, agricultural commodities, foreign exchange, energy, metals, and even cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD). It owns the CME (Chicago Mercantile Exchange, Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX), and the Commodity Exchange, Inc. (COMEX).

The company also owns a 23% stake in S&P Dow Jones Indices LLC, giving it exclusive rights to offer futures and options on the S&P 500 (SPX) Index.

This comprehensive array of offerings across different asset classes and the complexity of offering these products give CME a tangible moat and a competitive advantage. That’s because it is a one-stop shop for customers, and it enjoys a dominant market share in many of these products. For example, CME dominates the interest rates futures market, enjoying incredible 99% market share. 

The company also looks well-positioned for the long term as derivatives grow in popularity. For example, in June, CME’s average daily volume grew 8% year-over-year to 25.3 million contracts. 

The company will face some increased competition in interest rate futures in the form of BCG Group’s (NASDAQ:BCG) new FMX exchange, which is set to launch later this summer. This is likely one reason CME Group has fallen 11.9% from its 52-week high. However, CME Group has seen off many challengers in this area in the past, and even Howard Lutnick, the billionaire behind FMX’s push, admits that usurping CME is a tall order, calling CME “one of the great monopolies in America.”

Ultimately, there is little chance that FMX will unseat CME, but there is always the risk the newcomer could chip away at some of its dominant market share. Even then, a bit of healthy competition is never a bad thing, as it could bring new innovation to the space as a whole and push CME to further improve upon its business. Plus, interest rate futures are just one of CME’s many offerings, and CME Group appeals to investors as a one-stop shop for futures and derivatives across a multitude of asset classes.

Why 2.3%-Yielding CME Should be on the Radar of All Dividend Investors

CME is a dividend stock that currently features a 2.3% dividend yield. While this dividend yield may not make CME jump off the page at income investors at first glance, there’s a lot to like about it. 

First and foremost, CME is well on its way to becoming a powerhouse dividend growth stock. The company has paid a dividend for 20 consecutive years, and it has increased its dividend payment for the past 13 years in a row. Plus, it has been growing the dividend at an attractive 9.2% compound annual growth rate (CAGR) over the past five years. 

Even better, the company has made a habit of rewarding its shareholders with special dividends at the end of the year for many years. While these special dividends aren’t set in stone, the company has paid them for the last 12 years in a row. The company typically declares these special dividends in December and pays them out soon after in January.

In December of 2023, CME paid its holders a massive special dividend of $5.25 per share, which was actually larger than the sum of the company’s four regular quarterly dividend payments during the year (which totaled $4.40).

Note that these special dividend payments aren’t accounted for in CME Group’s dividend yield, as they are discretionary in nature. If one were to include CME Group’s special dividend in its yield, the company’s total of $9.75 of total dividend payments over the past 12 months would give it an attractive trailing 12-month yield of around 5% based on its current stock price. 

For these reasons, CME Group is a much more attractive dividend stock than its 2.3% yield implies. 

Reasonable Valuation 

CME Group is also relatively attractive from a valuation standpoint. Trading at 20.1 times consensus 2024 earnings estimates, CME Group may not be a dyed-in-the-wool value stock, but keep in mind that this is still a below-market-average multiple based on the S&P 500’s forward valuation of 22.7 times earnings. 

Is CME Stock a Buy, According to Analysts?

Turning to Wall Street, CME Group earns a Moderate Buy consensus rating based on five Buys, four Holds, and two Sell ratings assigned in the past three months. The average CME stock price target of $226.64 implies 15.7% upside potential from current levels.

The Takeaway 

With a yield of 2.3%, CME Group may sound like an unlikely candidate to be the next great dividend stock at first glance. However, the company’s strong dividend growth rate and its track record of consistently growing its dividend payout for the past 13 years bode well. Plus, the company’s habit of rewarding its investors with large, additional special dividend payments each year over the past decade-plus burnishes its allure as a dividend stock.

I’m bullish on CME Group for these reasons, as well as the stock’s strong business model and reasonable valuation. 

Disclosure