A Rising Tide Lifts This Boat

07/09/2007 12:00 am EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says the financial markets' strength has made information company McGraw-Hill a big success and it is likely to continue its winning ways.

Companies that have failed to transition when their primary markets come under fire-think newspaper stocks-have suffered substantial declines in recent years.

However, one firm that has transitioned nicely over the years is McGraw-Hill (NYSE: MHP). The company has benefited from its strength in information services. Indeed, its Standard & Poor's unit has benefited nicely from the growth in the debt market and overall rise in financial markets.

McGraw-Hill is a leading publisher of books and magazines. Popular titles include Business Week and Aviation Week. Business in these units has been mixed. However, the textbook business should improve with the expected pick-up in the state new-adoption market this year.

On the financial-services side, the firm's Standard & Poor's brand is a leader in information services. (Editor's note: InterShow has extensive business relationships with S&P in both its trade-show and Internet operations.) Business here has been strong-results in the first quarter were the best ever for S&P-as a result of the explosion in debt issuance due to heightened merger activity and the subsequent demand for the firm's ratings services. Also, strong financial markets have boosted demand for the company's database services.

To be sure, a slowdown in merger activity-not to mention a general falloff in the financial markets-would reduce demand here. Still, McGraw-Hill is riding a nice wave that should continue for at least the next 12 to 18 months.

Per-share earnings have moved higher annually for more than a decade, and record results are expected in 2007. The stock, trading at 22x the consensus fiscal 2007 earnings estimate of [around] $3.00 per share, is not cheap. (The stock closed below $67 Friday-Editor.) However, these shares offer attractive upside potential.

Per-share profits jumped 12% in 2006, and 2007 should show further growth. Profits are expected to rise at least 15% this year. The strong gains have fueled healthy dividend growth. The dividend was boosted 13% at the beginning of this year. McGraw-Hill has now raised its annual dividend for 34 consecutive years, one of fewer than 30 companies in the S&P 500 to accomplish this feat.

McGraw-Hill stock has been a solid performer, posting a higher high every year but one since 1996. Despite those gains, the stock has further upside potential. The issue has a kicker in its takeover potential. The publishing and information-services sectors have seen their share of takeovers, and McGraw-Hill would be a prized catch in the group.

Even without a takeover, these shares have a lot to recommend. DRIP (dividend reinvestment plan) investors should note that McGraw-Hill's direct-purchase plan permits initial purchases directly with a minimum $500. The firm will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of a minimum $100. While there is an enrollment fee of $10, there are no ongoing purchase fees.

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