MSCI: Why I Bought It With Double-Digit Dividend Growth Potential (MSCI)

It’s not often that the bluest of the blue chip compounders go on sale.

And knowing this, when these moments arrive, I do my best to tune out the macro noise and buy shares.

Yes, a war between Israel and Iran is scary. And that’s just one of many geopolitical headwinds that the market faces at the moment. Yes, that conflict could drive energy prices higher, contributing to persistently high inflation and therefore, increasing the threat of a more hawkish Fed moving forward. Higher-for-longer interest rates are scary for investors. Yes, uncertainty about consumer sentiment, earnings growth, the overall strength of the economy, and therefore, the fear of an overpriced stock market is scary.

But, in the world we live in, fear is unavoidable.

I don’t mean to downplay any of these potential threats to the market or the lives of humans across the globe. It’s true that each of these threats could manifest into something significant, causing pain and suffering, both physically and financially, for many, many people.

It’s sad that we live in a fallen world. But, I can’t control these things.

When I say I plan to ignore the headlines, it’s not in a blissful sense, but one anchored in long-term data.

You see, the US stock market has been climbing walls of worry about over a century now.

Despite a myriad of threats (both real and imagined), many of which were much more significant than any that we appear to be facing today, the US stock market has been making investors wealthy for decades.

In the face of wars, pandemics, recessions, and even depressions, the major US stock market indexes and the blue-chip companies that they’re composed of, have continued to march higher over the long term. Moving forward, I expect for that to continue to be the case.

With that in mind, I try not to worry about macro uncertainty.

As the old Peter Lynch saying goes, “Far more money is lost preparing for the next stock market correction, rather than staying the course through the correction.”

Instead of giving into fear, I want to be a buyer of weakness in the markets.

Paraphrasing from Warren Buffett this time, I want to accumulate shares of wonderful compounders, who have shown a propensity for reliable, predictable secular growth, whenever they’re trading for fair value (or better yet, a discount).

And, after selling off by more than 6% during the last 2 weeks, pushing its year-to-date losses down to nearly 11%, I believe that MSCI Inc. (NYSE:MSCI) is nearing fair value…which is rare because this stock has traded with an elevated premium for much of the last 7 years.

As I’ve said before, MSCI is one of the best dividend growth compounders in the entire market and anytime these shares dip down to fair value I want to be a buyer of this wonderful company.

On 4/15/2024, I added to my position at $520.01 and in this article I will explain why.

Then, on 5/17/2024, I bought more shares at $511.39.

And if the stock’s weakness continues, I’d be more than happy to build out this position even further.

An Often Overlooked Gem

To me, MSCI doesn’t get the love from investors that it should.

Other low yielding/high growing dividend stocks, like Visa (V) and Mastercard (MA) seem to be in the forefront of investors’ minds (and rightfully so).

I’m long both V and MA, and I consider them to be core holdings in my dividend growth portfolio. Without a doubt, those are wonderful stocks to own. But, MSCI offers a higher dividend yield, on-par dividend growth, and better long-term total return results than both of those blue chips.

Admittedly, I was late to the MSCI party. I began accumulating shares in May 2023. If I had bought into this story earlier (for years, I was spooked by the company’s high valuation), I’d be a much richer man today. But, there’s no use crying about missed opportunities in the past. Instead, I plan to learn from them. Because my position size is relatively small, MSCI is a top-priority buy for me. Ultimately, this is a holding that I’d like to push into overweight territory within my portfolio over time.

I wrote about MSCI in my article earlier in the year.

Simply put, this company checks all the boxes that I’m looking for when it comes to shareholder return-related metrics in a stock.

MSCI shares currently yield 1.22%.

The company’s 5-year dividend growth rate is 22.04%.

MSCI is on a 9-year dividend increase streak.

In 2023, it increased its dividend by 10.4%.

And in early 2024, it lived up to my double-digit dividend growth expectations, increasing its quarterly dividend by 15.9%.

Right now, MSCI’s consensus EPS growth rate for 2024 is 10%.

And, the stock’s forward payout ratio is just 43%, implying plenty of room for sustainable dividend growth ahead.

Furthermore, this company doesn’t just use its cash flows to pay a reliable growing dividend…it has consistently used an effective buyback program to reduce its outstanding share count.

Since 2010, MSCI has reduced its outstanding share count by more than 34%.

Naysayers here will point out that MSCI has been buying shares back at extremely high prices in recent years.

And that’s true – MSCI’s average P/E ratio during the past 5 years is 44.9x. That’s well above its 10 and 15-year average P/E ratios of 35.5x and 30.5x.

But, like other high margin, high free-cash flow businesses, I like management’s persistence when it comes to reducing its share count.

As a long-term, buy and hold type of investor, I benefit from the simple supply and demand dynamics associated with shares becoming more scarce.

And, because of MSCI’s strong growth prospects, I suspect that investors will look back on this company in 5-10 years and wish that they had bought shares at the prices that we’ve seen in recent years (despite high multiples).

Therefore, I believe that the billions of dollars that MSCI management has dedicated towards buybacks recently will prove to be a good use of capital, long-term, as well.

Simply put, give me a stock with a 1%+ dividend yield with 10%+ annual dividend growth prospects and an effective buyback program and that’s a stock I want to own.

These types of set-ups might not be exciting to investors who’re looking for higher dividend yields, but low-yielding/high-growth dividend compounders have shown the ability to outperform the market in a big way over the years… and MSCI is no different.

During the past 5 years, MSCI shares are up by 141.6%, nearly doubling the S&P 500’s 76.2% gains over the same period.

During the last decade, MSCI shares are up by 1,167.4%. That beats the pants off of the S&P 500, which is up by 178.8% during the same period.

This strong growth is why MSCI’s dividend yield is still so low today, even though it’s been providing strong double-digit dividend growth for years.

Someone who bought MSCI shares a decade ago would already have a yield on cost above 10%.

There aren’t any double-digit yielders with double-digit dividend growth prospects in the entire stock market.

The only way to own an asset like that requires patience as the compounding process plays out.

Sure, the past doesn’t predict future returns. But, in MSCI’s case, I think we’re talking about a very high quality, wide-moat company that has the potential to continue to outperform the markets and compound its dividend payments in a very meaningful way.

How Does MSCI Do It?

MSCI has been one of, if not the biggest beneficiary, of the passive investing trend over the past decade or so.

That company uses big data to put together stock indexes, portfolio risk management tools, performance analytics, and other data-driven products/services for clients.

This company has nearly $15 trillion of assets that are benchmarked to its indexes and it collects fees from clients who use these products.

To me, this company is a play on big data (which is becoming more and more valuable in the age of AI) and more importantly, the growth of the global economy moving forward.

As the AUM associated with the assets included in MSCI’s indexes rise, so will its sales/profits.

And, the company continues to innovate, collecting, packaging, and selling its data in different ways, creating more and more useful products/services for its clients, further diversifying its revenue stream.

MSCI’s index sales still represent about 40% of its revenue; however, the company sees a lot of growth in emerging product categories.

As you can see here, the company produced growth in all but one of its emerging growth initiatives in 2023 and management continues to be bullish on these growth prospects moving forward.

Roughly 97% of MSCI’s revenue from 2017-2023 was of the recurring variety (which leads to predictable sales, earnings, and growth results, helping to justify the stock’s high valuation premium).

Investors love predictability, after all.

In the same vein, ~74% of MSCI’s sales are subscription-based.

And, the company states that it has a ~90% retention rate across all of its products.

With retention rates like that, demand for these products is obviously strong, resulting in high margins.

During 2023, MSCI’s operating margin came in at 54.8%. And moving forward, management thinks that figure can rise even higher.

Not only are these sales predictable, but MSCI’s operational efficiency numbers are off the charts.

Last year, MSCI’s FCF conversion rate was 119% and since its 2007 IPO, its average operating FCF conversion is 131%.

Those 1000%+ share price returns over the past decade didn’t happen by accident.

They were justified by rising fundamentals.

These reliable, fast-growing sales and stellar efficiency rates have resulted in strong top and bottom-line growth for the company over the years.

And looking towards the future, I expect to see similarly strong growth for many years to come.

MSCI is predicting that it can maintain margins in the “high 50%” range while still growing its sales at a double-digit rate, resulting in 10-15% profit growth guidance over the long term.

In short, MSCI has set a very high bar to clear here, but given the excellence it has exhibited in the past, I don’t believe that these goals are farfetched.

Actually, I wouldn’t be surprised to see MSCI clear them by a wide margin, resulting in further outperformance, which is why this is a high-priority target for me to buy anytime shares fall down to my fair value estimate.

Valuation

Finding fair value here is where the problem lies.

Very high-quality companies with MSCI – with high rates of growth and high margins, to boot – typically trade with very high valuation premiums attached to them.

As much as I love owning blue chip compounders, I don’t want to knowingly overpay for shares.

Even if a company is posting strong, double-digit growth, paying too steep of a price can limit the stock’s return potential moving forward.

So, with all of that being said, let’s take a look at MSCI’s past, present, and future earnings multiples to attempt to find a fair price to pay.

Looking at MSCI’s 10-year average P/E of 35.5x, Friday’s sell-off pushed shares down below that level on a forward basis (as you can see on the chart above, 35.5x the consensus EPS estimate for MSCI in 2024 is $529.00).

Yes, that average is referring to MSCI’s blended P/E, not it’s forward P/E; however, because of the very reliable and predictable nature of MSCI’s growth, I’m happy to use forward earnings to generate my price target because I think the opportunity cost of sitting on the sidelines here is too great over the long-term.

As you can see, the stock has traded well above this 10-year trailing average for much of the last 7 years or so.

It’s rare to find an opportunity to buy shares in the 35x range…and that’s the exact opportunity that MSCI’s recent sell-off has provided.

Do I expect MSCI to generate 1000%+ total returns over the next decade like it has over the past decade? No. But, I do think this is a stock that could grow 3-4x over the next 10 years (I think a 12-15% annual EPS growth rate is realistic, which would justify that sort of upside) and dividend growth stocks with that sort of upside potential are prime buy candidates for my portfolio.

I also included the 30x level in the chart (represented by the pink line) because that threshold served as support several times for MSCI shares pre-pandemic.

30x forward earnings consensus is roughly $450.00.

I was content to add to my position in the $520 area. I don’t expect to see MSCI shares fall into the $450 range without a major bearish macro catalyst, but if they did, it would be a pretty easy “back up the truck” type of price point for me.

Admittedly, a ~35x forward multiple is a high price to pay for any stock. But, given MSCI’s growth and margin profile, it’s a multiple I feel comfortable with in terms of beginning to build up my position size.

Assuming the MSCI shares continue to hold that ~35x long-term average moving forward over the next couple of years, the stock’s growing EPS and dividend would result in double-digit total return potential.

In short, I think MSCI has the potential to be a ~$700/share stock in just a couple of years and therefore, I’m happy to begin adding to my position now that it has fallen back down to its 10-year average.

As always, I’ll average into this position slowly over time (unless, of course, something crazy happens, and we see this one dip down to that $450, 30x level in the short-term).

Up next, I’d love to buy more shares in the $500 area, and then the $475 area (but, those purchases will likely have to wait until May since I used up the rest of my April savings to make this $520 purchase).

Furthermore, if the S&P 500’s dip continues, and we fall into correction territory, allowing me to begin spending my first (-10%) bear market bucket, MSCI will surely be a part of that transaction.

Conclusion

Like I said before, this is a relatively small position for me (currently, MSCI makes up 0.71% of my portfolio) but I’d love to move MSCI’s weight up to the ~2% area over time.

To me, MSCI falls into a similar “must own” category as S&P Global (SPGI) and Moody’s (MCO) as high-growth compounders from the financial services industry.

If the Israel/Iran news from this weekend spooks the market and results in a macro sell-off this week, MSCI will be a top target for me because I believe that this company benefits from long-term secular growth trends and even though its yield is low, I consider MSCI to be a sleep well at night stock that I’m happy to own during just about any broader market environment.