This Financial-Data Powerhouse Has a Stranglehold on the Competition

The world runs on data.

There's no way around it. And as our world becomes increasingly more digitalized, we depend more and more on up-to-date, accurate data to do our jobs, pay our bills, and for everyday life to keep running smoothly.

That's especially true in the financial industry. From company financial data to share prices and more, the financial industry needs accurate, real-time information. It helps financial companies make decisions on lending, where to invest, and even how to track all these inputs.

Today's company dominates the financial-data industry, serving as a reliable source for all this information...

S&P Global (NYSE: SPGI) is a $107 billion provider of financial data.

The company formed under the name Standard & Poor's in 1941 with the merger of Standard Statistics and Poor's Publishing. The new company quickly became known as S&P.

Standard & Poor's was acquired by publishing firm McGraw-Hill in 1966. But in 2016, McGraw-Hill acknowledged that its S&P division had grown to overpower the rest of its business and changed the company's name to S&P Global.

Even those with little knowledge of financial markets likely know the S&P brand. And in a true testament to its value, two sources drive its brand identity: its power as a bond-ratings agency and its S&P 500 Index.

Those are just two of the four main divisions for S&P: Ratings, Indices, Market Intelligence, and Platts. Each of them has incredible power (and profitability) in their markets.

S&P is one of the "Big Three" in ratings agencies and one of only nine Nationally Recognized Statistical Ratings Organizations (NRSROs).

Put simply, when a company wants to issue a bond, it hires S&P to review its financials and give it a rating from AAA down to D. That rating then guides the market as to how risky the bond is and what interest rate is fair.

But it's more than that. Funds, pensions, and other institutions have specific rules written into their charters telling them precisely what ratings they can buy. An S&P rating isn't just a bit of analysis – it's a seal of approval that has become absolutely necessary to get a bond sold.

This business has surged over the past year...

Bond issuance has gone crazy. With interest rates low and companies wanting to build up a cushion for the COVID-19 recession, they issued bonds at a frantic rate.

On a longer-term view, total bond issuance has grown at a steady pace. This includes bonds from all sources – corporate, government, and otherwise.

S&P's bond business grew sales 16% in 2020, more than double the growth from the previous year. It now accounts for about 48% of sales.

Data is the second-largest part of S&P's business...

Its Market Intelligence division is essentially S&P's competitor to financial-data giant Bloomberg's business. Through brands like Capital IQ, S&P provides in-depth data for professionals at investment banks, wealth-management firms, insurance companies, and corporate treasury departments.

Market Intelligence accounted for about 28% of S&P Global's sales last year.

The third-largest part of S&P's business is its Index business, making up 13% of sales. This segment makes indexes of stocks – essentially lists – and licenses the indexes out to investment companies. That includes two of the most well-known indexes in the world – the above-mentioned S&P 500 and the Dow Jones Industrial Average.

But it's not just those two. S&P tracks more than 1 million indexes, many custom-built for specific clients. These indexes serve for both investing and benchmarking.

Last year, S&P made almost $1 billion from its Index business.

S&P's fourth business division is called Platts. Put simply, S&P's Platts segment is a data provider catering specifically to energy and commodity markets. It provides benchmark prices, which can then be written into contracts for which Platts receives licensing revenue. The group draws in $878 million in revenue.

S&P produces extremely thick margins...

It's easy to explain how the company earns such a high return on capital... Since the company has already established itself and laid the groundwork as a data provider, it can charge a high price, yet it doesn't need a lot of capital to run its business.

On its total $7.4 billion in revenue last year, S&P spent just $76 million in capital expenditures. That number is shockingly small. It allows S&P to count $3.5 billion of free cash from its $3.6 billion in cash from operations.

Put simply, S&P Global's business falls into a sweet spot. It is cheap to run and charges a high price to earn good returns. It has a similar stranglehold on competition to a large, capital-intensive business like a railroad – but it doesn't have a railroad's capital requirements.

At the same time, it has built a valuable brand and technological system that make it nearly impossible for an upstart to challenge it. It's a business that's hard to start, but phenomenally easy and profitable to keep running.

Sometimes investing is simple.