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The McGraw-Hill Companies, Inc. is a beguiling option for investors seeking both growth and income. This textbook publisher and financial information provider, yesterday announced its decision of a dividend hike, following which the shares of this Zacks Rank #3 (Hold) company gathered momentum and rose to a new 52-week high of $57.49, before closing at $57.38, up 0.3% from the previous day’s session.

Up Goes Dividend

The news of the dividend hike reflects its plan of utilizing free cash to enhance shareholders’ return, thereby boosting investors’ confidence in the stock.

The N.Y.-based company, raised its quarterly dividend by 9.8% to 28 cents (or $1.12 annually) from 25.5 cents a share (or $1.02 annually). The increased dividend will be paid on Mar 12, 2013, to stockholders of record as of Feb 26, 2013. The dividend yield based on the new payout and the last closing market price is approximately 2%.

In Jan 2012, the company last increased its quarterly dividend by 2% to 25.5 cents. Again, on Dec 27, 2012, McGraw-Hill announced a special dividend of $2.50 per share paid to shareholders of record as on Dec 18, 2012.

McGraw-Hill started distributing dividends way back in 1937. Since 1974, the company has boosted its dividend at a compound annual dividend growth rate of around 9.6% and is now among those S&P 500 companies (less than 25), which have raised dividend annually for the 40th straight year.

Other companies, which recently increased dividend, include Family Dollar Stores Inc. (FDO - Analyst Report), by 23.8% to 26 cents, Agilent Technologies (A - Analyst Report) by 20% to 12 cents, and BB&T Corporation (BBT - Analyst Report) by 15% to 23 cents.

Role of Dividend

Dividend hikes not only enhance shareholder’s return but raise the market value of the stock. Through this strategy, the companies bolster investor confidence on the stock, thereby persuading them to either buy or hold the scrip instead of selling them. Looking ahead, the company remains confident of its growth potential, suggesting enhanced value for shareholders via dividend payout as well as share buybacks.

A dividend hike primarily reflects the company’s sound financial position and defined future prospects. This is quite evident from McGraw-Hill’s balance sheet and cash flow positions. The company ended the third quarter of 2012 with cash and short-term investments of $1,245 million, and generated free cash flow of $420 million during the nine-month period.

Closing Comment

Given the earnings growth potential and ability to sustain dividend increases, the stock has enough ingredients to lure investors. McGraw-Hill is focusing on restructuring its portfolio of businesses and concentrating more on high growth operations, thereby enhancing shareholder value through proper capital allocation.

The company in Nov 2012 entered into an agreement with Apollo Global to divest its education division for $2.5 billion. McGraw-Hill stated that the company will be known as McGraw Hill Financial upon completion of the deal and will primarily focus on capital and commodities markets and include iconic brands like S&P Ratings, S&P Capital IQ, S&P Indices, Platts and Commercial Markets.

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