McGraw-Hill Dividend Analysis: Attractively Valued

The McGraw-Hill Companies, Inc. (MHP) 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 the 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 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: The author is long MHP

Comments

[Lisa:]

" If you kept reinvesting the dividends 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%."

What about the tax you'd have to pay on the dividends?

2008 Apr 02 12:53 PM

[fxtrader07:]

it is always telling when someone speaks about a stock, looks at only one aspect of the past (dividend history) and writes that forth into the future without bothering to actually look at this very future! by reading this poorly written pump on mhp one could think that the stock has dropped for little or no reason. the author keeps completely silent about the reason for the stock's drop and the risks involved with it. mcgrawhill owns standard and poors and this has been the largest generator of profits for them - need i say more? S&P probably gets even more under fire than moody's and there is lots more to come. the business model is not entirely broken but margins will be a far cry from the fat years and past earnings will not come back anytime soon.
tinstead of thinking over how to scale into the stock, the author might want to focus on the risks, properly assess them and then decide whether the stock was a buy in the first place.
i for my part won't touch it here. visibility is close to zero
disclosure: no position in mhp, neither in the past nor at present nor intended

2008 Apr 02 12:54 PM

[Muzovir:]

A truly weak piece - for the reasons fxtrader07 correctly notes. Until the situation in the structured finance marketplace, itself the profit engine for S&P, and thus, MHP, is resolved - either via the introduction of new products or otherwise, this is not an investment; rather a (hopeful) shot in the dark.

2008 Apr 02 07:36 PM

[Dividend Gr...:]

I am focusing on dividends because backtesting has shown that stocks that have increased their dividends for more than 25 consecutive years tend to outperform the market:

dividendgrowth.blogspo...

The Board of Directors recently authorized a 7.3% increase in the Company's regular quarterly cash dividend. The dividend increased from $0.205 to $0.22 per common share.
This dividend hike represents the 35th consecutive year that McGraw-Hill has increased its dividend. With a low payout at 30% i don't see a high probability of a dividend cut over the next several years.


This means that the company has increased its dividend every year since 1973. As a long term investor I can hold the stock in a diversified portfolio of other dividend growers even if the particular stock price fell further down, as long as the company keeps increasing its dividends(or doesn't cut them). My time frame is about 2-3 decades from now. Thus I am not overly concerned about what the company will do over the next several months and even 4-5 years from now.
I agree that I do look at the past to get some glimpse into the future. But so far this method of stock analysis has worked for me over the past several years. I know that the future might not exactly repeat the past, but I am willing to take that risk for myself.

I disagree that either of you knows what the future will be like for MHP. Either way I appreciate any constructive criticism to my analysis.

2008 Apr 03 12:24 PM

[BillySundance:]

This seems to be an entirely backward-looking article. There is no analysis of future business outlook for MHP's core businesses - S&P and Education. All over your points are based on MHP's historical returns. It sounds as if you are willing to assume that b/c management has sailed the ship nicely in the past that they will continue to do so in the future.

So why is NOW the time to start accumulating? Why MHP instead of another historically dividend paying stock like JNJ or KO for instance? Why is MHP in a better position to succeed than other historically dividend paying companies in other sectors? From a risk management perspective, how can you say with a high degree of certainty that MHP does not pose a more serious risk to your capital than companies like KO or JNJ? And how can you honestly say you aren't concerned at all with the possible risk to your capital investment?

MHP has had great success in generating LT shareholder returns, but tell us why they will continue to do so in the future. There is no justification offered of why MHP SPECIFICALLY will do so or why the next few months is the time to accumulate for the long term as opposed to taking this position in 1 or 2 or 5 or 10 years?

I am not writing this purely to say that you will be wrong, just that your article does not provide full range of analysis in making a multi-decade investment in MHP.

2008 Apr 05 04:50 PM

[wallstwatcher:]

It is quite easy to say this article is backward looking as it does focus almost exclusively on the history of dividends. But it is equally backward looking to harp on the problems of structured finance. That is yesterday's news. What we can be relatively certain of in the future is that Wall Street will continue to invent new ways to package securities and that ratings will play a large role in the acceptability of those packages. S&P and Moody's will continue to prosper simply because money mangers will continue to need the approval of ratings providers to cover their asses. When you buy an unrated issue based on your own research, you had better be right because you will be subject to enormous criticism if things turn sour. If S&P or Moody's rated the issue and it turns sour, well - you were not stupid, you were just guilty of believing the best people in the business.

Furthermore, the fastest growth area for S&P is European ratings. And the reason is the inexorable change in financing of corporations which has been brought about by the adoption of the Euro. Previously Eurpoean markets were largely contained within country borders and corporate financing was largely accomplished by bank loans. The advent of the Euro has turned corporate finance into a multi-nation market and the bond is the new tool of financing. S&P has grown and will continue to grow at an impressive clip in this market. Anyone familiar with the company has watched them purchase small local debt rating companies in many European countries over the past decade and a half. Their position is now just as dominant in this burgeoning market as it is in debt rating here. They have also invested in ratings companies in Asia.

Visability is not as great as it has been in the past. Earnings may slip. But the stock has a PE multiple of 12 and it has historically been closer to 18-20. That covers a pretty steep decline in earnings. When things are perfectly visable Wall Street reacts and moves market prices up and down quickly. When things are cloudy Wall Street drop prices far beyond rationale levels because money managers hate the risk of having to buy on their own research. No guts, no glory.

2008 Apr 05 09:16 PM