Analysts attribute the recent dramatic increase in CME Group’s stock price, nearly $50 in two weeks, to adjustments in its dividend structure announced at the Feb. 2 fourth quarter earnings report.
CME Group raised the first-quarter dividend 59% to $2.23 a share, based on an increased payout target from 35% to 50% of the prior year’s cash earnings. CME Group’s board of directors also established an additional annual variable dividend, which amounts to $3 per share in 2012.
“We believe it’s primarily because of the announcement of the dividends, [both] the variable as well the increase in the regular dividends,” says Niamh Alexander, analyst at Keefe, Bruyette and Woods. “They’ve kind of hit that sweet spot where it’s probably enough to keep investors waiting for a better market environment and better earnings.”
CME Group stock had steadily declined since the start of 2011 when the MF Global bankruptcy put added pressure on the stock. MF Global was one of CME’s largest clearing members and the CME stock dropped nearly 20% from the day prior to the bankruptcy announcement to its January low of $224.69, which dates back to May 2009.
According to a CME press release, this additional variable dividend will supplement the regular dividend and will change annually depending on a variety of factors. For this year, the total for both dividends amounts to $5.23 per share, payable March 26.
“The increase in our regular dividend and the addition of the variable dividend confirm both our optimism about our ability to drive continued growth and strong cash flows, and also our strong commitment to returning capital to CME Group's shareholders," CME Chief Financial Officer Jamie Parisi said in the release.
Rich Repetto, partner at Sandler O’Neill, says the combination of the two dividend upgrades increases the dividend yield of CME stock to between 4% and 4.5% and makes the stock attractive to a bigger audience. “I think it opens up the door to a different type of investor – investors that gravitate to dividend-paying yielding stocks,” he says.
Alexander says the annual variable dividend gives the company flexibility with a solid steady dividend that has potential to grow. She adds that the positive reaction to the announcement was not only due to an increase in the dividend but the long-term commitment to dividends.
“Certainly it’s been a lot more dramatic than we would’ve expected, but when we saw the announcement we knew it was definitely going to be interpreted positively,” she says.
Regarding the financials for full-year 2011, the diluted earnings per share was $27.15, though fourth-quarter revenues suffered a $3 million negative impact because of the MF Global bankruptcy. Fourth-quarter diluted earnings per share was $11.25.