Running one of the world’s most active stock exchanges is no easy task, but it’s a task that the London Stock Exchange (LSE: LSE) has managed to do exceptionally well over the past 10 years.
The London Stock Exchange Group was created in October 2007 when the LSE merged with the Milan Stock Exchange, Borsa Italiana. The LSE itself can trace its roots back more than three centuries, but today it is much more than just the operator of London’s leading market.
As well as the LSE and Borsa Italiana, the group also owns Europe’s leading fixed income market, a Pan European equity trading platform called Turquoise, stakes in some of Europe’s largest clearing houses and FTSE Russell, the index provider. In other words, the company is one of Europe’s largest financial services businesses operating key trading infrastructure across the continent.
LSE’s success in managing these key critical businesses (as well as the successful purchase and integration of other businesses to expand its influence) has helped the company double earnings per share over the past five years. Today, the group reported adjusted earnings per share for 2017 of 149p, up 19% year-on-year thanks to total revenue growth of 17% to £1.8bn. Total income for the period grew 18%.
A tight grip on costs ensured that all of this revenue growth went to the bottom line with adjusted operating expenses only rising 6%. All of the company’s businesses reported double-digit growth during the year.
This performance has given management confidence to hike the full-year dividend payout by 19% to 51.6p “reflecting the strong outlook for the group.” At the time of writing, this distribution equals a dividend yield of 1.3%, which hardly makes the LSE the best income stock around, but the firm’s double-digit earnings growth more than makes up for the lack of income.
Indeed, LSE has never really been much of an income stock, but this hasn’t stopped the company achieving tremendous returns for investors over the past 10 years. The shares have produced an annualised total return of 13% over the past decade, compared to a return of just 6% for the FTSE 100, and I believe that this strong performance is set to continue.
LSE is currently investing heavily to reduce its dependence on traditional equity markets and develop new products and services, which should help make income more predictable rather than being subject to the whims of market movements.
City analysts expected this investment to help the company produce double-digit (18%) earnings growth for 2018, and management is hinting at the prospect of further cash returns for investors as the business grows. Last year management returned £200m via a share buyback in addition to the dividend.
Unfortunately, LSE’s leading position in the financial services industry, and its robust growth outlook, mean that the market has placed a high price on the shares. The stock is currently trading at a forward P/E of 22.8 based on City forecasts for 2018. Nevertheless, while this valuation may look high in comparison to some companies, I believe it’s a premium worth paying considering the LSE’s market dominance and history of growth.
‘Britain’s Warren Buffett’ Nick Train also believes the company can keep up its current rate of expansion as the LSE is currently one of the top holdings in his Lindsell Train UK Equity fund.