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McGraw-Hill Companies (MHP) Stock Analysis

The McGraw-Hill Companies, Inc. provides information services and products to the financial services, education, and business information markets worldwide. The company operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. Just a few weeks ago this dividend aristocrat increased its quarterly dividend by 4.40% to 23.50 cents per share, which was the 37th consecutive annual dividend increase for the company.

The stock has delivered an average annual total return of 10.20% over the past decade.

Earnings per share have grown at an average pace of 7.60% per annum. The company has also has repurchased 2.80% of its outstanding stock annually on average since 2001. For FY 2010, analysts expect the company to earn $2.63/share, which is higher than 2008’s EPS of $2.33. For FY 2011 analysts expect McGraw-Hill to earn $2.95/share. A reduction in the amount of debt being offered could affect the company’s Financial Services segment, which accounts for almost three quarters of its operating profit. Changing regulations and competitive environment could also affect this major segment, which includes the Standard & Poors brand. The remaining 16% and 7% of operating profits are achieved from the company’s education and media segments.

Annual dividends per share have increase by an average of 7.50% annually, which is in line with the growth in earnings. A 7.50% growth in dividends translates into the payment doubling every almost ten years. McGraw-Hill has managed to double its distributions every eleven years on average since 1988.

The return on equity has fluctuated between a low of 12.80% in 2006 and a high of 55.30% in 2008. Over the past few years it has remained above 30%, which is impressive.

The dividend payout ratio has consistently remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

McGraw-Hill currently trades at 14.50 times earnings, has an adequately covered dividend, and yields 2.60. I would consider adding to my position in McGraw-Hill on dips below $31.30.

Full Disclosure: Long MHP

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