Tuesday, April 1, 2008

McGraw-Hill (MHP) Dividend Analysis

The McGraw-Hill Companies, Inc. provides information services and products to the education, financial services, and business information markets worldwide. Its McGraw-Hill Education segment operates as a global educational publisher.

It is a dividend aristocrat as well as a major component of the S&P 500 index. It has been increasing its dividends for the past 35 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 10.80 % to its shareholders. The majority of the gains were erased in 2007 though, when the stock dropped from a high of 72.50 in June 2007 to a low of 43.46 by December.

At the same time company has managed to deliver an impressive 23.8% average annual increase in its EPS since 1998.

The ROE has increased from 25% in 1998 to over 65% in 2007. Return on Total assets also increased from a low of 8.80% in 1998 to a high of 16% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 8.60% annually, which is significantly below the growth in EPS. A 9% growth in dividends translates into the dividend payment doubling almost every 8 years. If we look at historical data, going as far back as 1987, MHP has actually managed to double its dividend payments every ten and a half years.

If we invested $100,000 in MHP on December 31, 1997 we would have bought 5405 shares (Adjusted for two 2:1 stock splits in 1999 and 2005). In February 1998 your quarterly dividend income would have been $527. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1293.34 by November 2007. For a period of 10 years, your quarterly dividend income has increased by 110 %. If you reinvested it though, your quarterly dividend income would have increased by 145%.

The dividend payout has decreased from 90% in 1998 to less than 30% by the end of the study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that MHP is attractively valued with its low price/earnings multiple of 12.50 and above-average yield at 2.40%. Given the recent sharp declines in the stock, I think that the best strategy in accumulating MHP is to spread my purchases over several months as opposed to investing all my money at once.

Disclosure: I own shares of MHP

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