McGraw Hill Financial is a world well-known provider of financial data and analytics. Company is an owner of S&P brand (indices, rating agency). Company was founded in 1917. Company is divided into four business units:

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More than 65% of revenues are generated in U.S.

Portfolio of clients is gradually changing in good direction. Corporates stand for 48% of revenues. In 2007 around 44% was for structured finance (now 12%).

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Business is probably in the best condition ever. I don’t like buying shares when everything is awesome and financial prospects can only deteriorate…

It is worth to notice, that some revenues in S&P Ratings Services are recurring and some are transaction related (around 50/50). With good situation on stock market results are significantly higher than during bear market. Moreover if we look in 2007-2009 share price dropped a lot. This was due to low credibility of rating agencies after giving AAA ratings to junk financial products.

 

As it comes to financials (estimates):

Market cap ~ $24B

Net debt ~$2B

Payout ratio ~30%

Beta = 1.06

Dividend yield 1.7% + buyback, together in 2015 around $1.3b, 5.4% returned to shareholders.

 

Estimated valuation ratios:

EV/EBITDA = 10.8

P/E = 16.9

 

McGraw Hill Financial (MHFI) is one of The Dividend Aristocrats with history of increasing dividend payments since 1974 year. Currently dividend yield is around 1.7%  – nothing special. Historically in 2009 DY was above 4% and in years 2010-2013 above 2%, so for me 1.7% is simply far too low dividend yield.

 

Drawdown risk analysis:

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A decline since July is about 20+%. It is quite a lot, nevertheless historically shares were falling even as much as 40-60%. For me current valuation is still high and dividend yield is low. I think 40% drawdown would be a special occasion, which means shares traded at $65 levels last seen in 2012 year.

 

Summing up, MHFI is a cyclical business and I think it is not a good time to build position. I will wait for bear to come and give me more discount to share price.

 

Disclaimer MHFI – no position