The Enduring Appeal of S&P Global: A Deep Dive into a “Wonderful Business”
In the world of investing, few businesses stand out as consistently exceptional. S&P Global (SPG) is one such company, a stalwart in the financial markets that has delivered remarkable returns over the past four decades. For investors seeking stability, growth, and profitability, S&P Global exemplifies what Warren Buffett might call a “wonderful business.” But what makes it so special, and is it still a buy at its current valuation? Let’s explore.
Check out the full video on YouTube, if you prefer reading however, keep scrolling.
The Hallmarks of a Wonderful Business
Warren Buffett, the legendary investor, has long emphasized the importance of investing in businesses with durable competitive advantages, strong pricing power, and minimal capital requirements. S&P Global checks all these boxes. As Buffett noted in a 2010 Berkshire Hathaway annual meeting, “The ratings agencies have had and still have, under current conditions, an incredibly wonderful business.” He highlighted the industry’s lack of capital intensity, significant pricing power, and impressive profit margins, often ranging between 40% and 50%.
S&P Global operates in a sector that is deeply intertwined with the growth of financial markets. As global debt issuance increases and financial markets expand, the demand for credit ratings and analytics grows in tandem. This positions S&P Global to benefit from long-term macroeconomic trends, including the rise of artificial intelligence (AI) and the increasing complexity of global financial systems.
Financial Performance and Resilience
S&P Global’s financial performance underscores its status as a high-quality business. The company has raised its annual dividend for 52 consecutive years, a testament to its consistent profitability and commitment to shareholder returns. Even during challenging periods, such as the 2008 financial crisis, the company demonstrated remarkable resilience. While revenues fell by 40% from 2008 to 2011, profitability remained intact, highlighting the strength of its business model.
In more recent years, S&P Global has continued to thrive. Despite a 4% revenue decline in 2022 amid a declining market, the company maintained strong profitability. This resilience is a key characteristic of a wonderful business—one that can weather economic downturns and emerge even stronger.
The Role of AI and Future Growth
The rise of AI presents both opportunities and challenges for S&P Global. On the one hand, AI has the potential to enhance the company’s analytical capabilities, improve efficiency, and drive innovation. On the other hand, it could disrupt traditional business models. However, S&P Global’s management views AI as a net benefit, leveraging it to improve their offerings and maintain their competitive edge.
The company’s focus on AI aligns with broader market trends, where businesses that embrace technological advancements are often rewarded with higher valuations. For S&P Global, this could mean further growth in earnings and market share, particularly as global debt issuance continues to rise.
Valuation Concerns: Is S&P Global Overpriced?
While S&P Global’s business fundamentals are undeniably strong, its valuation raises some concerns. The stock currently trades at a price-to-earnings (P/E) ratio of 43, significantly higher than the P/E ratio of 10 that Warren Buffett paid when he first invested in Moody’s, a comparable business, in 2004. This discrepancy highlights the importance of entry points in investing. While S&P Global is a high-quality business, paying a premium valuation increases the risk of short-term volatility, especially in the face of market downturns or rising interest rates.
Value Investing Risk & Reward Quadrant (check all the stock analyses)
The Key to S&P Global’s “Wonderfulness”
What truly sets S&P Global apart is its role in the investment ecosystem. As Buffett has pointed out, rating agencies like S&P Global provide a critical service: they offer a layer of accountability for institutional investors. When pension funds or asset managers invest based on a credit rating, they can shift blame to the rating agency if the investment goes sour. This “not my fault” dynamic creates a durable moat for S&P Global, ensuring its relevance in the financial markets for decades to come.
Conclusion: A Solid Long-Term Investment with Caveats
S&P Global is a quintessential example of a wonderful business. Its strong competitive advantages, resilient profitability, and alignment with long-term market trends make it an attractive investment for those seeking stability and growth. However, its high valuation and sensitivity to market fluctuations warrant caution. For long-term investors, S&P Global remains a solid buy, but those concerned about short-term volatility may want to wait for a more favorable entry point.
As Warren Buffett demonstrated with his investment in Moody’s, the key to maximizing returns lies in identifying wonderful businesses at reasonable prices. While S&P Global may not offer the same 100-bagger potential it did 40 years ago, it remains a cornerstone of any well-constructed portfolio. For investors willing to embrace its inherent risks, S&P Global is a business built to endure and thrive in the ever-evolving world of finance.