Volatile financial markets are also less favorable environments for companies to issue debt in, and financial clients such as investment banks and asset managers have less money to spend when M&A deal volumes fall, trading volumes drop, and assets under management decline in value. These are all bad things for McGraw Hill’s business in the near-term, although they arguably have little impact on the company’s long-term earnings power.
Finally, it’s worth mentioning that longer term, the greater availability and affordability of data is likely to remain a theme. Information is becoming cheaper and easier to access every day. Depending on how this plays out, it could begin to erode some of McGraw Hill’s competitive advantages, although for now it seems extremely unlikely that its customers would have a trusted, deep enough alternative to consider.
Dividend Analysis: McGraw Hill
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. MHFI’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
McGraw Hill’s dividend is extremely safe as indicated by the company’s Dividend Safety Score of 83. The company’s earnings payout ratio over the last 12 months is 32%, which is relatively low and provides management with plenty of flexibility to keep paying and growing the dividend. Over the last decade, McGraw Hill’s earnings payout ratio has also remained near 30%, which means the company’s dividend growth has been sustainably fueled by earnings growth.
While McGraw Hill’s low payout ratio is a plus, its sales are sensitive to broader health of financial markets. When capital markets decline in value, fewer bonds are issued and many clients are less willing to spend money on new data, tools, and analytics. As a result, we can see that MHFI’s business did not fare too well during the financial crisis.
Source: Simply Safe Dividends
Importantly, McGraw Hill has generated free cash flow in each of the last 10 years. Free cash flow is needed to pay dividends, repay debt, repurchase shares, and fund acquisitions. Companies with strong business models generate consistent free cash flow, and McGraw Hill is no exception. The company’s businesses are very scalable and require little incremental capital to grow, generating plenty of cash.
Source: Simply Safe Dividends
The company’s strong brands, capital-light operations, and valuable information have allowed it to achieve exceptional returns on invested capital over the past year. Even during the financial crisis McGraw Hill achieved a return of at least 17%. Businesses with high returns and plenty of opportunities for growth can grow their earnings and dividends faster.
Source: Simply Safe Dividends
