McGraw-Hill Companies 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.

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 15.60 times earnings, has a sustainable dividend payout and yields 2.20%. I would consider adding to my position in the stock on dips below $40.

Full Disclosure: Long MHP

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