Moody’s May Make Investors Smile

It’s an ironically appropriate name for a financial services company. Moody’s (NYSE:MCO) wields enough power to, on a whim, make an entire country feel financially vulnerable or at ease.

Founded in 1909 by John Moody, today Moody’s has become a multibillion dollar firm with about 4,500 employees in more than 26 countries. As one of the big three credit rating agencies — competing against Standard & Poor’s and Fitch Ratings — Moody’s touts a 40% stake in the global credit market.

The company grabbed headlines this week by saying it may downgrade the U.S.’s pristine Aaa credit rating (the highest rating possible) if lawmakers can’t reach a debt deal. On Aug. 2, the U.S. will have reached a self-imposed deadline to raise its borrowing limit, which is currently set at $14.3 trillion and is close to being maxed out. Moody’s said Wednesday that it could cut the U.S.’s sovereign rating as soon as the day after the nation misses a debt payment, if that scenario occurs. Doing so could lead to an economic catastrophe.

Meanwhile, Moody’s has been influential in Europe with several recent credit downgrades. In the first week of July, Moody’s cut Portugal’s credit rating to junk status. It has also downgraded Ireland’s rating to junk status, warning that the debt-laden country — which took a 67.5 billion euro bailout package last year — would likely need a second bailout. A stone’s throw away, Italy, the third-largest economy in Europe, has also been warned it may be the next country to have its credit rating cut by Moody’s.

The slew of downgrades has prompted many European investors to feel animosity and suspicion toward the credit rating agency. However, Moody’s appears to be acting with integrity and objectiveness.

Aside from the ill feelings from world leaders, the company looks fundamentally strong and investing in the stock could cheer investors. The company has solid revenue and earnings projections. Additionally, it offers a 1.5% annual dividend and has increased its dividend by 33% over the past two quarters.

After years of keeping its dividend relatively consistent throughout the year, Moody’s has increased its dividend for two consecutive quarters. In April, Moody’s boosted its quarterly dividend to 14 cents a share from the 11.5 cents it paid in the first quarter, which was an increase from the 10.5 cent quarterly dividend it paid in 2010. Furthermore, with dividend increases during seven of the past eight years, investor’s can likely count on future dividend boosts.

The credit rating agency also looks fundamentally sound. On July 27, Moody’s will report second-quarter 2011 results. With strong corporate debt issuance and increased structured finance ratings, analysts’ project revenue will increase 15% to $549.3 million from $477.8 million in the year-ago quarter.

For the full year, revenue is expected to rise 12.8% to $2.3 billion, compared to $2 billion last year. Growth is projected to continue into 2012, with sales rising a further 7% to $2.5 billion.

The earnings outlook is equally strong. Second-quarter earnings are expected to increase 18.4% to 58 cents a share, from 49 cents a share in the comparable year-ago quarter. For the full year, earnings are projected to rise nearly 20% to $2.36 a share, from $1.97 last year. By 2012, analysts expect earnings to increase an additional 10% to $2.60 a share.

Given Moody’s growing dividend and solid financial outlook, investors looking for a relatively stable financial stock may want to consider one that could potentially help upgrade their portfolios.

Article printed from InvestorPlace Media,

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