McGraw-Hill: Simple Way To Increase Dividends Every Year

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McGraw-Hill (MHP) is a dividend champion. The company has been increasing its annual dividend payout for the past 39 consecutive years. McGraw-Hill has regularly paid dividends since 1937. Since 1974, the company has boosted its dividend at a compound annual dividend growth rate of 9.6% and is now among those S&P 500
companies (less than 25) which have raised dividends annually for the 39th straight year. Prominent investors Scott Black and John Hussman added to their positions last quarter. Recently Barclays initiated coverage on McGraw-Hill with an Overweight rating and a price target of $64. Warren Trades blog recommended MHP when the stock broke $49 in September. After that, the stock rose 14%.

With the recent separation of McGraw-Hill into two public companies, MHP aims to further develop its education segment, McGraw-Hill Education. McGraw-Hill Education is one of the leading global educational publishers. This segment consists of two operating groups: the Higher Education, Professional and International Group ("HPI"), serving the college, professional, international and adult education markets, and the School Education Group ("SEG"), serving the elementary and high school markets. As one of the premiere global education publishers, McGraw-Hill Education aims to reaffirm its position as a leader in the international mathematics arena with its recent acquisition of Key Curriculum, a private developer of technology for educational purposes. This move by the company poses promising opportunities for business outside the United States as Key Curriculum currently operates in 19 countries across the globe. McGraw-Hill Education accounts for 40% of the whole company's revenues.

The company also boasts of its McGraw-Hill Financial, which includes top leading brands: Standard & Poor's Ratings Services, S&P Capital IQ, S&P Indices, Platts energy information services and J.D. Power and Associates. McGraw-Hill's second-quarter 2012 earnings of $0.85 per share beat average analyst estimates of $0.76, and rose 25% year-over-year. The strong performance of S&P Capital IQ/S&P Indices and Commodities & Commercial helped to alleviate the volatility in the global credit market, thereby boosting the profitability This increase in revenues is largely attributed to the growth rate of S&P Capital IQ (10% y/y) and S&P Indices (17% y/y) of $277 million and $366 million, respectively. S&P Capital IQ and S&P Indices are the strongest offerings of McGraw-Hill Financial and both continue to deliver revenue growth year over year. Despite the very demanding and competitive climate set in the financial arena, customers continue to trust the company as S&P Capital IQ reported a 13% boost in the number of new clients. S&P Dow Jones Indices is now the biggest provider of financial market indices.

McGraw-Hill's Commodities & Commercial group also reported strong quarterly growth. Revenues increased 45% to $71 million from both of its labels Platts energy information services and J.D. Power and Associates. The McGraw-Hill Companies declared on October 2012 the purchase of Kingsman SA, a source of global prices and market data in the field of biofuels and sugar that is based in Switzerland. This acquisition is predicted to enhance Platt's business strategies that would translate to further expansion in the global arena, a possible addition to the 150 countries that benefit from Platts' reports on petrochemicals and shipments in the energy market.

MHP has expanded its net margins and ROE. The company has a 49% Return on Equity, a 14% net margin and year EPS growth rate and a 13% EPS growth, combined with a high ratio of free cash flow per share to reported EPS in FY12. I find it attractive that MHP has a great record of quarterly EPS growth fueled by its financial segment.

McGraw Hill competes against Pearson (NYSE:PSO), Reed Elsevier (RUK) and Scholastic Corporation (NASDAQ:SCHL) among other companies. MHP trades at a P/B of 10x and P/S of 2.51 while Pearson trades at just 1.66x book and 1.72. sales. RUK and SCHL trade also at lower multiples than MHP. Reed Elsevier trades at 6.29x P/BV and 4.19x P/S while Scholastic trades at 1.24x book and just 0.48x sales. This is evidence that the market is placing high expectations on McGraw Hill.

In conclusion, I think that MHP trading at 20x P/E ratio does not represent an obvious value opportunity, but is one of the dividend stories I find most compelling. With several quarters of consecutive revenue growth, 39 consecutive years of dividend increases, strong balance sheet fundamentals and growing institutional interest, the stock could break recent new highs.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MHP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.