Nasdaq, Inc. (NASDAQ:NDAQ) is a $23.3 billion market capitalization exchange and data services company that is a free cash flow (FCF) powerhouse.
So much so that it recently raised its dividend by 11% to $2.40 as of April 20. That makes NDAQ stock a unique play in the middle of a market crash.
You would think that the stock of a large exchange like Nasdaq would not be valuable in a market crash like the past three or four months.
But trading volume is not its only revenue source, as data and analytics make up about 65% of its net revenue after transaction-based expenses. That is much less volatile and more recurring than trading-related revenue.
In fact, last quarter it generated $570 million in FCF based on its cash flow statement on page 5 of its Q1 10-Q filing. That was more than enough to pay its $89 million in quarterly dividends. The new dividend will cost no more than about $99 million.
It could be significantly less given that Nasdaq is also buying back its shares with its extra FCF. For example, last quarter it spent $142 on share buybacks. This automatically increases the dividend per share over time as the share count declines.
Where This Leaves Investors in NDAQ Stock
As of May 13, NDAQ stock has a dividend yield of 1.66% (i.e., $2.40/$147.60 price on May 13). This is slightly higher compared to its average of 1.61% over the past 5 years, according to Morningstar. That implies that NDAQ stock is worth $149.06 (i.e., $$2.40/0.0161 = 149.06), or 4.77% higher.
Moreover, in the past 5 years, its average forward price-to-earnings (P/E) multiple has been 20.7x. Today, according to Refinitiv (Yahoo! Finance) its forward P/E is 18.4x. This implies that NDAQ could be worth 12.5% more (i.e., 20.7x/18.4x-1 = 12.5%).
So between these two metrics NDAQ stock is worth at least 6.6% more, or $151.57 per share. Moreover, if Nasdaq keeps buying back its shares NDAQ stock could move significantly higher.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
