McGraw Hill Financial Inc (NYSE:MHFI) owns one of the most important brands in the financial services market and has grown into a powerhouse provider of mission-critical information.
The company’s many strengths have enabled helped it grow its dividend for more than 25 consecutive years, making it a member of the dividend aristocrats list and a high quality dividend stock we would consider for our Top 20 Dividend Stocks portfolio.
McGraw Hill Financial witnessed a decline in sentiment from the top money managers tracked by Insider Monkey during the fourth quarter. 47 of those investors held shares of the company on December 31, down from 56 on September 30. While the value of their holdings did increase by about 7.8% during the quarter, to $2.80 billion, that was well under the 14% gain in the stock during the quarter, which shows that there was indeed some collective selling of shares. John Armitage’s Egerton Capital was one of the hedge funds in our system which held on to its stake in MHF, increasing it by 9% to 5.63 million shares.
Business Overview
McGraw Hill Financial was incorporated in 1925 and has grown to be a major financial data and analytics company that serves many different customers in capital markets and commodity markets such as investment banks, asset managers, insurance companies, stock exchanges, energy traders, automotive executives, and more. Some of McGraw Hill’s famous brands include Standard & Poors (S&P), S&P Capital IQ, Platts, and J.D. Power.
By customer type, McGraw Hill generated 48% of its revenue from corporates, 19% from investment managers, 17% from commercial banks / insurers, and 16% from investment banks.
The company’s business consists of four segments today which generate 40% of their sales outside of the U.S.
S&P Ratings (46% of sales, 52% of segment profit): provides credit ratings, research, and analytics to investors and bond issuers. S&P Ratings has been providing important information for over 150 years to help investors make better decisions and improve companies’ access to capital markets.
S&P Capital IQ and SNL (25% of sales, 14% of segment profit): provides a wide range of research, data, analytics, and tools in the form of desktop and enterprise solutions. Customers such as asset managers, investment banks, and others in the financial markets use them make better investment decisions, track their performance, analyze risk, and more.
S&P Dow Jones Indices (11% of sales, 18% of segment profit): provides global indices that serve as benchmarks for investors. This segment makes money from exchange traded funds (ETFs), derivatives, and index-related licensing fees. It is well positioned to grow from the trend toward passive investing.
Commodities & Commercial (18% of sales, 16% of segment profit): provides analytics, pricing data, and other information to help businesses improve their performance and help markets increase their transparency. Its main brands include Platts and J.D. Power.
Business Analysis
McGraw Hill primarily benefits from its strong brand recognition. Participants in financial markets and executives in commercial markets need extremely reliable, accurate, and trustworthy information to make critical business and investment decisions.
The company’s primary brand, Standard & Poor’s, has been around since 1860, establishing long-lasting customer relationships built on trust and quality. McGraw Hill purchased S&P in 1966 and hasn’t looked back.
In addition to hard-to-replicate brands built on reputation and trust, McGraw Hill’s business benefits from the U.S. Credit Rating Agency Reform Act of 2006 that requires financial market participants to use nationally recognized statistical rating organizations (NRSROs). These are the only ratings agencies that the U.S. Securities and Exchange Commission permits other financial companies to depend on for regulatory purposes.
There were only 10 NRSROs as of December 2015, which limits competition and helps McGraw Hill maintain strong market share and profitability. Registration with the government is very difficult, and new players have no reputation built up, which keeps barriers to entry high for the company’s S&P Ratings segment.
