MSCI Inc.: Double-Digit Dividend Growth Stock Of The Month (NYSE:MSCI)

An investment concept I’ll be exploring this year is double-digit dividend growth. There is nothing more motivating for me as an investor than the annual raises we receive from dividend-paying stocks/ETFs. The raises are almost always more than my W-2 increases, which I work thousands of hours more to achieve than managing my investment portfolio. 2%, 3%, and 4% raises aren’t really getting you ahead. 7%, 8%, 9% I really start to feel like I’m getting somewhere. 10%, 12%, 20%?! I’m ecstatic!

MSCI Inc. (NYSE:MSCI) is one such stock that has delivered double-digit dividend growth consistently, thanks to its excellent business model & management and I’m considering starting a meaningful position as a core holding for a double-digit dividend growth portfolio I’d like to assemble.

About MSCI

MSCI functions as an investment research firm that supplies institutional investors and hedge funds with stock indexes and portfolio tools, specializing in risk, analytics, and governance. Renowned for its stock indexes covering diverse geographic areas and capitalization markets, including small-caps, mid-caps, and large-caps, with over $13T assets under management (AUM). The firm supports the investment industry by furnishing research, data, and tools for analyzing and investing in global markets. Additionally, MSCI’s stock indexes serve as benchmarks for funds monitoring various global markets.

I poked around on the site and can certainly see the compelling nature of their data sets and their use cases. Things like GeoSpatial: global datasets on physical assets (offices, production facilities) owned or operated by publicly listed companies. I’m hoping our portfolio managers are digging through to see the effects of continued decline or rebound in the commercial real estate space. This can all hit the balance sheets of companies differently and affect parts of the REIT sector. Another dataset that caught my eye is Carbon Transition Beneficiaries: companies that are likely to benefit from the low carbon transition. Whether you agree or not, policy decisions and government subsidies can have a tremendous effect on business models operating in this space and therefore, the rise and fall of corresponding stocks. The oil industry is actually a great example of this. MSCI hopes to provide data to answer such questions and influence the risk management of such investments.

In the past 10 years, MSCI outperformed the S&P 500 by about 5X in total return, 1300% vs. 210% respectively. MSCI is actually a part of the S&P 500 with a position of about 0.10% by weight.

What catches my eye with this stock is its impressive double-digit dividend growth, which is currently the highest quality company with the highest 3-year average annual dividend growth rate in January 2024 at about 21%. Omitting 2015 data (the jump in payout is misleading) I calculate an average annual payout growth of 27.57%. Its CAGR to 2023 is currently 20.52%.

Whichever way you want to measure it, all metrics are consistently elevated above 20%. The catch is management’s targeted payout ratio of 40% with a yield typically only around 1%, but what does this translate to yield on cost (YOC)? In 10 years, one would achieve a 12.5% YOC, effectively making your initial investment a 12.5% yield. High Yield Savings Accounts (HYSA) are extremely unlikely to have this average yield after 10 years. Even our beloved Schwab U.S. Dividend Equity ETF (SCHD) only has a 7.37% YOC after 10 years with a 5-year growth rate of about 13%. Let’s look at how this company has been able to deliver such strong performance these last 10 years.

Financial Statement Highlights

• Income Statement
• Balance Sheet
• Cash Flow Statement

Income Statement

Looking at the income statement, I dug a little deeper to compare the company’s gross profit vs. core expenses. I confounded the expenses: Selling, General, & Admin (SG&A), R&D, and Depreciation into one number as a percentage of gross profit. SGA is a majority of the cost, anywhere between 69% and 75% of all the costs depending on the year. My rule of thumb, using Warren Buffet’s rules, is for SGA to be < 30% of gross profit, which most years, especially as time has gone on have been < 30%. Actually, all costs combined have trended downward to 28% as of 2023, keep in mind that’s including R&D and Depreciation too! Meanwhile, gross profit margin also steadily trended upward from the mid 70% to 82% in 2023. This double whammy shows an extremely strong income statement trend.

Balance Sheet

This pillar of the books is where it’s not as pretty for me. Over the decade, total liabilities rose about twice as fast as total assets and are greater than the latter at $5915M > $4866M respectively. Most of this is due to long-term debt. The company does on the books, have a negative shareholder equity due to this, but the current ratio is > 1 at 1.36, so liquidity is not an issue. The earnings per share (EPS) have also been really strong, with a policy of share buybacks which can skew the books and ever-increasing cash supply. For these reasons, I’m not super concerned, I have to assume the long-term debt is used to ensure long-term equity appreciation but will continue monitoring this.

Cash Flow Statement

The cash flow statement revealed strong insights. The cap rate in 2013 was at 20% and by 2023 is now just 3% of net earnings. The rule of thumb I use is to be < 25% so even in 2013, this was no problem, but the fact it trended down to 3% is quite impressive. On the upside, we see the profit margins almost double in 10 years from 20% to 40%. The co-variate alongside this would be the company’s return on assets (ROA) which more than tripled from 6% to 20%, indicating an efficient use of the company’s assets contributing to the profit margin improvements. My rule of thumb for profit margin is > 20%, which in MSCI’s case, shows excellent results and overall efficiency.

Risk Analysis

Of course, the overarching macro-risk here is: past performance is not indicative of future results. Can MSCI keep up this performance in the future? I brought up the long-term debt as a risk already, but what about the overall business model itself?

Most of the company’s operating revenue comes from its Index and Analytics divisions. All divisions show healthy YoY growth. If the company’s indexes significantly underperform long term to other indexes/investment firm-backed ETFs, then the company could see more net outflows, which would reduce their income from the management fees, this can happen extremely quickly too.

Despite some of the conservative media I listen to stating ESG & Climate was a negative for corporate earnings this year, not for MSCI. While the segment is only about 10% of the revenue model, it did see growth. I think if this thematic investing model shows significant underperformance long-term, it will be reflected in the recurring subscription revenue declining in paying for the data and indices, but the fact is, investment managers and layman investors do care about sustainable investment strategies for our little rock in the universe.

I did notice their net new subscription sales in both the Americas and EMEA were down significantly YoY. Should this type of trend continue, we could see slower revenue and therefore dividend growth, which is the key metric for making this investment worthwhile from an income standpoint. The last 10 years have posted significant growth rates, is that really sustainable for the next ten years? Or is a more modest 5-8% more realistic? Only time will tell. A counter to this is that new segments can be created, may I suggest an AI thematic segment to drive new and expanded subscription licenses.

Positioning

In the future, while I don’t plan to start a massive solo position in MSCI, I am interested in bringing the company into a double-digit dividend growth portfolio as a core holding (< 5%) alongside other companies with similar strong performance and management. The consistently high dividend growth can get us past the low yields and durable competitive advantage can ensure sustainability as a long-term income investment.