CME raises dividend, sets new payout

(Reuters) - CME Group (CME.O), the biggest U.S. futures exchange operator, surprised investors with a sharp increase in its dividend and a new annual payout on top of that, overshadowing disappointing fourth-quarter results and sending its shares up 4.5 percent.

The company also said it would set up a $100 million fund to insure farmers and ranchers who trade on the CME markets, a response to the bankruptcy of MF Global (MFGLQ.PK). CME, which was MF Global's main regulator, has been under scrutiny for whether it did enough to protect customer funds.

Macquarie Securities analyst Ed Ditmire said the fourth-quarter results were "materially disappointing and surprising" but that the dividend would be welcomed by investors who have been seeking a better capital return. His peers concurred.

"A decent quarter for CME in a challenging period for volumes; more importantly in our minds, a hike in capital return should be a positive catalyst for the name," Credit Suisse analyst Howard Chen said in a note to clients.

CME shares rose $11.01 to $256.49 in morning trade.

CME, which operates the Chicago Mercantile Exchange, the Chicago Board of Trade and the New York Mercantile Exchange, earned $745.9 million, or $11.25 per share, in the fourth quarter, up from $196.2 million, or $2.93 per share, a year earlier.

The latest results included a $528 million benefit from an adjustment to the value of deferred tax liabilities.

CME won a tax break from Illinois legislators late last year that cuts its tax bill by more than $70 million annually. The break allows CME to count less than a third of its trading income as taxable under state law, versus 100 percent before.

Excluding that benefit, and $30 million in losses related to the MF Global bankruptcy, CME earned $3.55 per share in the quarter. Analysts polled by Thomson Reuters I/B/E/S expected, on average, $3.64.

RISING EXPENSES, LOWER VOLUMES

A decline in clearing and transaction fees and a rise in what CME calls "other" expenses, including marketing spending, accounted for most of the decline in operating income.

Trading volume fell 2 percent from a year earlier, though average revenue per contract rose 4 percent from the third quarter to 81.1 cents. The firm cited higher volume in higher-priced commodity contracts.

Volumes are coming back after a "temporary blip" following the failure of MF last year, CME said.

It said it had changed its dividend policy, raising its payout target to 50 percent of the prior year's cash earnings, up from 35 percent. Under the new formula, it raised its first-quarter dividend 59 percent to $2.23 per share.

It also said it would institute an annual variable dividend, to be decided in the first quarter each year and paid on top of the regularly quarterly distribution. This year it will be $3 per share.

CME Chief Financial Officer Jamie Parisi, on a conference call with analysts, said the company was focused on dividends as a way to return capital and that investors should not assume the company will buy back any stock this year.

For 2012, the company said it will continue to hold down expenses, with expenses expected to grow anywhere from 2 to 5 percent, depending on volume growth.

'COMFORT' FUND

Separate from its earnings, CME said it would set up the new $100 million fund to try to draw farmers and ranchers back to the market for what it called "bona fide" hedging activities.

The fund, due to be up and running by March 1 and backstopped by an insurance policy, will pay farmers and ranchers up to $25,000 each per account and cooperatives up to $100,000 each in the case of a failure of a market player.

But the fund will not be retroactive, leaving out those whose money is still tied up in the MF Global case, and it is cappeed at $100 million, meaning that if a failure exceeds that level, the payouts will be reduced proportionally.

CME Chairman Terry Duffy, referring to family farmers and ranchers, said during the conference call, "This is a constituency that basically started these businesses way back when, and the world relies on these producers. They do need to rely on our markets."

(Reporting By Ben Berkowitz in Boston, additional reporting by Ann Saphir in Chicago; Editing by Derek Caney, Maureen Bavdek and John Wallace)