McGraw Hill Financial Inc (MHFI): Famous S&P Brand Supports This Dividend Aristocrat

McGraw Hill’s balance sheet is in good shape and further bolster’s its Dividend Safety Score. The company has about $1.5 billion in cash compared to $3.6 billion in debt and could cover its debt with cash and 1.1 years’ of earnings before interest and taxes (EBIT). Its interest coverage ratio is also a very healthy 18.8.

Source: Simply Safe Dividends

McGraw Hill’s dividend is very safe. The company’s low payout ratio, strong cash flow generation, recurring revenue, and healthy balance sheet make it a rock solid dividend payer.

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

McGraw Hill’s Dividend Growth score of 53 is about average. The company is a member of the dividend aristocrats list and has increased its dividend by 7.2% per year over the last decade. Most recently, management raised the company’s quarterly dividend by 9% in January 2016.

With an earnings payout ratio near 30%, healthy recurring revenue, and potential for decent growth going forward, we believe McGraw Hill can continue increasing its dividend at a mid-single digit rate barring a collapse in bond issuance or broader capital markets.

Valuation

MHFI’s stock trades at 18.4x forward earnings estimates and has a dividend yield of 1.5%, which is roughly in line with its five-year average dividend yield of 1.6%.

The company’s diluted earnings per share have compounded by 9.7% per year over the last five years, and we expect a high-single digit rate of growth to continue. Under this assumption, McGraw Hill’s total return potential appears to be close to 10% per year. We believe the stock is fairly priced today.

Conclusion

McGraw Hill Financial Inc (NYSE:MHFI) is a blue chip dividend stocks that has many hard-to-replicate businesses and brands. We like the company’s strong base of recurring revenue, but it’s hard to get comfortable with the risk of slowing bond issuance trends. We would ultimately prefer to buy this stock if it was weakened considerably more by growing macro concerns, which are enough to keep us on the sidelines for now.

Disclosure: None