McGraw-Hill Companies Inc., New York symbol MHP, rose 17% the week of September 12 after it announced that it will split into two separate, publicly traded companies. One of these new firms, McGraw-Hill Markets, will sell a variety of financial-information products. This business will include Standard & Poor’s, which provides credit ratings on bonds, and McGraw-Hill’s J.D. Power market-research firm. McGraw-Hill Markets will have annual revenue of $4 billion. International sales will account for 40% of that total. The other company, McGraw-Hill Education, will publish textbooks for schools and colleges. This business will have $2.4 billion of annual revenue. McGraw-Hill still plans to sell its nine TV stations, which account for 2% of its revenue. The company is still working on the details of the split, but it aims to hand out shares of McGraw-Hill Education as a special dividend by the end of 2012. This will probably be a tax-free transaction: shareholders will not have to pay capital-gains taxes until they sell their new shares.
Investing strategy: Value of two new companies tends to grow over time
As part of this plan, McGraw-Hill also plans to buy back $1 billion of its shares in 2011. That’s equal to 7% of its $13.7-billion market cap. In terms ofinvesting strategy, break-ups like this tend to work out well for investors, because the total value of the two new companies usually exceeds the value of the former parent over time. We updated our advice on McGraw-Hill in our September 16, 2011, Wall Street Stock Forecaster hotline, You can view it immediately view when you take a 1-month free trial to Wall Street Stock Forecaster, our newsletter written especially for Canadians whose investing strategy includes U.S. stocks with a substantial margin of safety. Click here to get started right away. (Note: If you are a current Wall Street Stock Forecaster subscriber, please click here to view Pat’s recommendation. Be sure to log in first.)
