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Growth & Income

Shares of The McGraw-Hill Companies, Inc. (MHP) have been trending largely higher since posting its second-quarter 2012 results, which marked the third straight quarter with a positive earnings surprise. The company reached a new 52-week high of $50.79 on August 29, jumping roughly 11% since the results were announced.

With a long term earnings growth projection of 10.5% and a dividend yield of 2%, this Zacks #2 Rank (Buy) textbook publisher and financial information provider offers a lucrative option for investors seeking both growth and income.

Mixed Second Quarter

On July 26, 2012, McGraw-Hill posted second-quarter 2012 earnings of 85 cents per share that surpassed the Zacks Consensus Estimate of 76 cents by 11.8% and the year-ago earnings of 68 cents by 25%. The company stated that the strong performance of S&P Capital IQ/S&P Indices and Commodities & Commercial boosted the quarterly profits.

Management now expects 2012 earnings at the higher end of its guidance between $3.25 and $3.35 per share.

Total revenue of $1,547 million fell short of the Zacks Consensus Estimate at $1,587 million and edged down 1% year over year, due to a revenue decline of 12% at McGraw-Hill Education, partly mitigated by an increase of 5% in McGraw-Hill Financial. Operating income rose 14% to $407 million, whereas operating margin expanded 330 basis points to 26.3%.

Earnings Momentum Climbing

The Zacks Consensus Estimate for 2012 inched up 1.2% to $3.36 per share over the last 60 days, implying year-over-year growth of 15.3%. The current estimate is a penny above the high-end of the company’s guidance range.

For 2013, the Zacks Consensus Estimate is $3.79 per share, increasing approximately 3.0% and marking year-over-year growth of 13.0%.

Dividend Portraying Strength

McGraw-Hill has regularly paid dividends since 1937. The company has boosted its dividend at a compound annual rate of 9.6% since 1974. It is also repurchasing shares from time to time. The quarterly dividend was most recently increased by 2% to 25.5 cents per share in January 2012, which currently yields 2%. McGraw-Hill’s commitment toward enhancing shareholders’ returns reflects its sound liquidity position and well defined future prospects.

Valuation Stretched, Yet Lucrative

McGraw-Hill currently trades at a forward P/E of 15.14x, reflecting a 6.1% premium to the peer group average of 14.27x. Again, its price-to-book ratio of 8.21 is at a substantial premium to the peer group average of 1.17. Given the long-term earnings growth projection of 10.5%, the PEG ratio comes in at 1.4, above the benchmark of 1 for a fairly priced stock but below the industry average of 1.8. The return on equity (ROE) for the stock looks very impressive. It has a trailing 12-month ROE of 50.6% compared with 14.3% for its peer group.

A Look at the Chart

After witnessing volatility in the past, the stock price has now started to correlate with the increasing trend in estimates. The year-to-date return for the stock is 13.1% compared with the S&P 500’s return of 10.4%.

Given the earnings growth potential, recent positive earnings surprises and its ability to sustain dividend increases, the stock has enough ingredients to lure investors. Furthermore, management’s decision of splitting the company into two, McGraw-Hill Financial and McGraw-Hill Education is prudent in the current economic environment, as it will provide the new entities a level playing field in their core business areas.

New York-based McGraw-Hill is a diversified publisher and provider of financial information and media services to customers. It is a leading textbook publisher and owns one of the top credit rating agencies (Standard & Poor’s). It operates through two business segments: McGraw-Hill Financial and McGraw-Hill Education. McGraw-Hill, and has a market cap of $14.23 billion.

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