Dividend Analysis - McGraw Hill Companies Inc (NYSE:MHP)
17 July 2007I am still looking for more companies to add our to dividend portfolio. The next S&P 500 Dividend Aristocrat to take center stage is McGraw Hill Companies Inc. This company trades on the NYSE and trades under the symbol MHP.
Company Profile:
From Yahoo Finance
The McGraw-Hill Companies, Inc. provides information services and products to the education, financial services, and business information markets worldwide
McGraw-Hill Companies is definitely more diversified than I originally thought. Check out the full profile at Yahoo Finance. Market capitalization is $22.18B and employs over 20,000 people.
Company Fundamentals:
McGraw-Hill Companies Inc has been steadily increasing their return on invested capital over the last 10 years. From 14.20% back in 1997 to an astounding 32.90% in 2006! Management has been doing a superb job.
Of course, this is reflected in the return on equity as well. However, the return on equity has been much more consistent over the last 10 years. The 10 year average is 25.14% while the 5 year average ROE is 27.01%. The discrepancy from the ROIC tells me that McGraw-Hill has been reducing their debt over the last 10 years as well as improving returns for shareholders.
MHP has had an interesting equity growth profile. The first 4 years show fairly pedestrian looking, single digit increases. Then some impressive growth rates in the 18% range for the next 3 years. And now? Last year’s equity growth rate was negative 9.37%.
Earnings per share growth rate has been quite consistent. Over the 10 year period, the EPS growth rate was 14.56%. Over 5 years, it was 15.40%. And over 3 years, it was 15.46%. Last year’s EPS growth rate was 10.13%. Interesting divergence from the equity growth rate. Normally, I would expect these to walk hand in hand.
Sales growth rate has been quite consistent in the 7%-8% range over the 10 year period.
Dividend Fundamentals:
McGraw-Hill Companies Inc currents sports a dividend yield of 1.29%. This is quite low by most standards. And unfortunately, the dividend growth rate has been equally low at 8.5% over the last 5 years. So a low yield coupled with a fairly low dividend growth rate. Not exactly what I was hoping to see.
One bright spot though is the dividend payout ratio. It has decreased from a high in 1997 of almost 50% to last year’s lowest dividend payout ratio of 29%. MHP definitely has room to move to increase its dividend if management so chooses.
And cash flow growth rates have been very nice and quite steady over the 10 year period at 12.04%. So there should be no reasons for a healthier dividend growth rate!
Valuation Models:
From a dividend yield perspective, MHP is currently on the low side of the historical averages. Over the last 5 years, the average high dividend yield is 1.81%. Over the last 10 years, it has been 2.06%. At the current 1.29% dividend yield, it is lower than the average low dividend yields. So this stock is definitely expensive right now.
If I demand the 10 year average high dividend yield of 2.06%, then the model price is $39.80. At the current price of $6.57, that is a premium of almost 60%!
And the Graham number confirms that MHP is currently too expensive. The Graham number is $21.21. That is a premium of almost 200%!
Let’s see what our third valuation model shows us:
- future P/E of 20.80 (most conservative historical P/E)
- future EPS growth rate of 10.35% (determined from the equity growth rates). This is more conservative than the analysts’ forecast of 12.80%.
- dividend yield of 2.06% (minimum yield that I will accept based on 10 year average high dividend yield)
- future dividend growth rate of 8.47% (average dividend growth rate over the last 10 years)
All this information leads me to a model price of $47.47. Once again, a premium of almost 34% over the current price.
See my calculations here.
Conclusion:
This stock does not look like a candidate for our superior dividend portfolio. The dividend yield is low and is not being grown at a quick enough pace to catch up to other dividend paying stocks.
And all my evaluation methods show that this stock is currently over valued. And strangely enough, this stock has come off a recent high in the $72 range!
I will just close the chapter on this one and move on.
Full Disclosure: I do not own any shares in MHP.
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on July 17th, 2007 at 2:48 pm
What percent of your entire portfolio is dividend stocks?