Mcgraw-Hill Companies Inc (MHP), Moody’s Corporation (MCO), a Tarnished Brand & Good Profits

Although the company has never been aggressive when it comes to buying back shares, it has slowly and steadily lowered its share count in each of the last ten years. The extra cash on hand and lower short-term debt should allow the company to continue this practice in addition to increasing its dividend.

Furthermore, each of the company’s segments are growing at a high-single digit rate — and operating profits should follow a similar growth rate. Although the threat of a large settlement with the Department of Justice is real, the competitive position of the company has not been impaired. Therefore, investors can put aside short-term concerns in favor of looking at the bigger picture.

The big picture

I think the company will produce $1.2 billion in cash from operations during 2013, along with $200 million in capital expenditures. This leaves us with $1 billion in free cash flow during 2013 — or $3.60 per share.

The stock currently changes hands at around $50 per share, so $3.60 represents a 7.2% free cash flow yield. In the long run, I believe Mcgraw-Hill Companies Inc (NYSE:MHP) will grow free cash flow per share at a mid-single digit rate. Therefore, I expect investors who buy the stock today to earn a 10% to 12% annual rate of return on their investment.

The article Tarnished Brand but Untarnished Profits originally appeared on Fool.com and is written by Ted Cooper.

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