McGraw-Hill (MHP) Dividend Stock Analysis

The McGraw-Hill Companies, Inc. (MHP) provides information services for the financial, education, commercial, and commodities markets worldwide. The company operates in four segments: Standard & Poor’s Ratings, S&P Capital IQ/S&P Indices, Commodities & Commercial, and McGraw-Hill Education. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1937 and increased payments to common shareholders every for 39 consecutive years.

The company’s last dividend increase was in January 2012 when the Board of Directors approved a 2% increase to 25.50 cents/share. McGraw-Hill ‘s largest competitors include Moody’s (MCO), Pearson (PSO) and Reed Elsevier (RUK).

Over the past decade this dividend growth stock has delivered an annualized total return of 6.10% to its shareholders.

The company has managed to deliver 7.10% in annual EPS growth since 2002. Analysts expect McGraw-Hill to earn $3.30 per share in 2012 and $3.64 per share in 2013. In comparison McGraw-Hill earned $2.75/share in 2011.

McGraw-Hill Companies will separate in two different companies by the end of 2012 – McGraw-Hill Financial and McGraw-Hill Education. This will allow each business to be more focused and will unlock value for shareholders in total. The Education division will be spun off through a tax-free distribution of shares to stockholders. The financial division is in talks with CME Group and Dow Jones to create a joint venture focusing on indexes – S&P/Dow Jones, in which MHP will have a 73% stake. New business ventures, as well as strategic acquisitions could bolster the bottom line in future years. In addition, as there is rising amount of savings in index funds and ETF’s, the company should benefit through the fees it charges for the underlying indexes.
One of the major risks behind the Financial division is increased regulation from governments and governmental organizations throughout the world concerning the role of rating agencies and their operations.

I would find the Education business to be having better economics, as textbooks typically come up with newer editions very often, which leads to a consistent revenue stream for the publisher. In addition, I expect a higher rate of students enrolling in colleges, which should be good for business. As our society becomes more complex, the need for education increases, which should add to the bottom line of companies like MHP Education.

The company has managed to increase Return on Equity from 28.20% in 2002 to 45.20% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 7.80% per year over the past decade, which is higher than to the growth in EPS.

An 8% growth in distributions translates into the dividend payment doubling almost every nine years. If we look at historical data, going as far back as 1989 we see that McGraw-Hill has managed to double its dividend every eleven and a half years on average.

The dividend payout ratio has mostly remained between 30% and 39% , with the exception of 2007. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently McGraw-Hill is fairly valued at 16.30 times earnings, has a sustainable dividend payout and yields 2.10%. I would consider adding to my position in the stock on dips below $40.

Full Disclosure: Long MHP

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