Stock Analysis: McGraw-Hill Companies Inc (MHP)

This article originally appeared on The DIV-Net September 8, 2008.

Linked here is a PDF copy of my detailed analysis of McGraw-Hill Companies Inc (MHP) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The McGraw-Hill Companies Inc. is a leading information services organization serves worldwide markets in education, business, industry, other professions and government.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MHP is trading at a discount to 1.), 2.) and 3.) above. Since MHP's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, MHP is trading at a 11.7% discount. MHP earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

MHP earned one Star in this section for 3.) above. MHP has paid a cash dividend to shareholders every year since 1937 and has increased its dividend payments for 35 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA

MHP earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. The negative NPV MMA Diff. means that on a NPV basis for every $1,000 invested in MHP you would earn $2,310 less than a MMA earning a 20-year average rate of 4.61%. If MHP grows its dividend at 7.3% per year, it will never equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: MHP is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. MHP noted in its 2007 10-K report filed with the SEC in February 2008 that among the risks facing its businesses are the level of educational funding both domestically and internationally, and the health of capital and equity markets, including future interest rate changes.

Conclusion: MHP earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and lost one Star in the Dividend Income vs. MMA section for a net total of one Star. This quantitatively ranks MHP as a 1 Star-Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $24.91 before MHP's NPV MMA Diff. decreases to the $3,000 NPV MMA Diff. that I like to see. At that price MHP would yield 3.53%. MHP will not be joining my dividend income portfolio in the near-term.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in MHP (0.0% of my Income Portfolio) .

What are your thoughts on MHP?


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