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McGraw-Hill Cos.

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A healthy dividend yield of 1.9% and a long-term earnings growth projection of 14.8% make The McGraw-Hill Companies Inc. (MHP) an attractive option for investors seeking both growth and income. This textbook publisher and financial information provider declared a special dividend on Dec 6, 2012, sending shares to a 52-week high of $57.44 on Dec 11. This Zacks Rank #2 (Buy) has returned roughly 19% over the past year.

MHP has an impressive record of outperforming quarterly earnings estimates. In the past 4 quarters, it has an average surprise of more than 7%.

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 also repurchases shares from time to time. The quarterly dividend was last increased by 2% to 25.5 cents per share in Jan 2012, which currently yields 1.9%.

On Dec 6, 2012, the company announced a special dividend of $2.50 per share, which was paid on Dec 27. McGraw-Hill’s commitment toward enhancing shareholders’ returns reflects its sound liquidity position and well defined future prospects.

Impressive Bottom-Line Result

On Nov 2, 2012, McGraw-Hill posted third-quarter 2012 earnings of $1.33 per share, surpassing the Zacks Consensus Estimate by 2.3% and beating the year-ago earnings by 10%. The company stated that the strong performance of S&P Indices/S&P Capital IQ and Commodities & Commercial boosted the quarterly profits.

Total revenue of $1,953 million fell short of the Zacks Consensus Estimate, but rose 2% year over year due to a revenue increase of 15% at McGraw-Hill Financial. This was partly offset by a decline of 11% at McGraw-Hill Education. Total operating profit jumped 3% to $627 million, whereas operating margin expanded 30 basis points to 32.1%.

Buoyed by healthy results, management raised its 2012 earnings guidance to between $3.35 and $3.40 per share, compared to the earlier projection of $3.25 to $3.35.

McGraw-Hill is slated to release its fourth quarter and full-year 2012 results on Feb 12, 2013.

Earnings Momentum Climbing

The Zacks Consensus Estimate for 2012 inched up 0.6% to $3.42 per share over the last 60 days, implying year-over-year growth of 17.4%. In the last 30 days, the estimate has risen by 0.3%. The current estimate is 2 cents above the high end of the company’s guidance range.

For 2013, the Zacks Consensus Estimate is $3.80 per share, which has climbed a sharp 4.4% in the last 30 days. The current estimate implies year-over-year growth of 11.2%.

Valuation Stretched, Yet Lucrative

McGraw-Hill currently trades at a forward P/E of 14.13x, reflecting a 1.7% premium to the peer group average of 13.89x. Its price-to-book ratio of 8.08 is also at a substantial premium to the peer group average of 1.12. Given the long-term earnings growth projection of 14.8%, the PEG ratio comes in at 0.97, below the benchmark of 1 for a fairly priced stock. The return on equity (ROE) for the stock looks very impressive. It has a trailing 12-month ROE of 54.4%, compared with 10.8% for its peer group.

The stock price has now started to correlate with the increasing earnings estimates. Currently, the stock price is in the range of $50.00–$55.00, and the consensus estimates for 2012 and 2013 are steadily moving upward. The stock has generated a return of 19% over the past year, compared with the S&P 500’s return of 14.2%. Volume averages roughly 2,453K daily.

Given the earnings growth potential, recent positive earnings surprises and its 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.

In Nov 2012, the company 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 the 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.

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). The company has a market cap of $14.92 billion.

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