Stock Analysis: McGraw-Hill

The McGraw-Hill Companies, Inc. (MHP) provides various information services for the financial, education, and business information markets worldwide. It operates in four segments: Standard & Poor’s (S&P), McGraw-Hill Financial, McGraw-Hill Education (MHE), and McGraw-Hill Information & Media (I&M). The company is a dividend champion which has increased distributions for 38 years in a row. The most recent dividend increase was in January, when the Board of Directors approved a 6.40% increase to 25 cents/share. The major competitors of McGraw-Hill include Pearson (PSO), Moody’s (MCO) and Meredith Corp (MDP).

Over the past decade this dividend stock has delivered an annualized total return of 4.20% to its loyal shareholders.

The company has managed to deliver an impressive increase in EPS of 7.50% per year since 2001. Analysts expect McGraw-Hill to earn $2.86 per share in 2011 and $3.12 per share in 2012. This would be a nice increase from the $2.65/share the company earned in 2010. The company has managed to decrease the number of shares outstanding by 2.70% per year over the past decade through share buybacks, which has aided earnings growth.
The company’s high return on equity has doubled over the past decade to 40%. 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 11.90% per year since 2001, which is higher than the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling every 6 years. If we look at historical data, going as far back as 1989, we see that McGraw-Hill has actually managed to double its dividend every eleven years on average.

Over the past decade the dividend payout ratio has remained below 40% for a majority of the time with the exception of a brief period in 2001. 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 trading at 14.40 times earnings, yields 2.60% and has a sustainable dividend payout. The stock meets my entry criteria, and I will look forward to adding to my existing position in it.

Full Disclosure: Long MHP

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