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3.5% Dividend Yield – With a Sweetener: CME Group Learns to Share the Wealth

Once, derivatives exchange operator CME Group (CME) was a remarkable growth vehicle. It helped pioneer the sector’s switch from mutual to public ownership, and for several years following its initial offering a decade ago, CME shares enjoyed a remarkable run-up. But that kind of pell-mell momentum is probably over for the parent of the CME, CBOT and Nymex exchanges. CME’s revenue growth slowed, and recently turned negative. Not surprisingly, its share price has been relatively dormant for some time.

CME Chart

CME data by YCharts

A variety of issues are to blame: the MF Global collapse has thrown a shadow over CME, industry competition is fierce, and global trading volume has weakened. The slowing momentum may have played a role in directors’ recent decision to raise the company’s quarterly dividend by a hefty 59%, to $2.23. That pushed CME’s formerly not-too-impressive dividend yield up to 3.45% -- a rate that doesn’t match competitor NYSE Euronext’s (NYX) hefty yield, but is definitely solid enough to draw the attention of yield-hunting dividend investors.

The industry’s maturation may be changing boards’ views regarding dividends: CME competitor Intercontinental Exchange (ICE) still doesn’t pay any dividend, but Nasdaq OMX (NDAQ) recently initiated a modest quarterly payout. So now, the field looks like this:

NYX Dividend Yield Chart

NYX Dividend Yield data by YCharts

There’s a way that CME’s yield could be viewed as even more attractive. When the company’s board raised the quarterly dividend, directors also approved an additional “annual variable dividend,” to be paid in the first quarter of each year, based on results of the prior year. The first annual payment, of $3.00, was made in March. Dividend-yield calculations generally don’t incorporate atypical payouts, but if we did build in the $3 annual dividend, CME’s payout would be $11.92 -- and its yield would be an impressive 4.7%.

Either way, this is a company that’s lost some of its pizzazz but still has solid fundamentals. Margins have held up even as revenues weakened, and CME continues to throw off lots of cash. Barring a massive migration of derivatives trading away from exchanges, CME isn’t going away.

CME Profit Margin Chart

CME Profit Margin data by YCharts

If the variable annual payout holds up, CME’s a very interesting stock for divident investors. Even if we discount that payout, the underlying yield makes this stock worth a close look.

Of course, whenever we yield junkies buy a stock for its income, we’re also purchasing the underlying security. Before committing, it just makes sense to study up on the company’s fundamentals, and to read through its 10-K as well.

James P. Miller is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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