Dividend Driving Returns
CBOE has been paying regular dividends since 2008. In 2012, the annual dividend payout was raised to $1.29 per share from 20 cents in 2010, reflecting an increase at an annual compound growth rate of 154% since 2010. The strong cash flows generated by the company along with the absence of debt have resulted in a sturdy balance sheet and abundant free cash.
While the company recently paid a special dividend, it last hiked its dividend by 25% to 15 cents in July 2012. CBOE also deploys its excess capital through share buybacks from time to time.
Steady Third Quarter
On November 1, CBOE reported operating earnings per share of 43 cents in the third quarter of 2012, which exceeded the Zacks Consensus Estimate by 13.2% but fell short of year-ago earnings. Over the last 4 quarters, CBOE has generated an average earnings surprise of 6.6%.
Operating net income declined 15.7% year over year to $37.7 million. However, reported net income increased to $45.8 million or 52 cents per share from $41.3 million or 45 cents in the year-ago period. Results mirrored lower operating expenses and steady revenue per contract, partially offset by the impact of the ongoing market volatility.
Subsequently, total operating revenues declined 11% year over year to $128.3 million, while operating expenses declined 2% to $67.5 million. Nevertheless, management reaffirmed its guidance for 2012. The company’s diverse product line, market share gains and disciplined financial management should allow it to continue delivering strong results, especially once the low industry-wide trading activity rebounds to its historical highs.
Earnings Estimates Moving Higher
The Zacks Consensus Estimate for 2012 is currently pegged at $1.66, which is up 1.2% in the last 30 days as 9 of 14 estimates moved higher. This implies year-over-year growth of 5.6%. The Zacks Consensus Estimate for 2013 is $1.87, representing a year-over-year increase of 12.7%.
Shares of CBOE currently trade at the 12-month forward earnings of 17.5x, a 12% premium to the peer group average of 15.6x. The premium valuation is justified given its strong fundamentals. ROE stands at 56.9%, compared with the peer group average of 16.2%.
The company has been continuously outperforming the NASDAQ since last year, and has also been outperforming its 200 days moving averages since the end of December. The stock has gained 27.0% over the past year, compared with NASDAQ’s return of 15.7%.
CBOE is the leading options exchange in the U.S., which offers equity, index and ETF options. It also provides proprietary products such as S&P 500 options, along with options and futures products on the CBOE Volatility Index. With a market capitalization of about $2.9 billion, the company competes with CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE), among others.
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