MCGRAW-HILL COMPANIES INC. $55 (New York symbol MHP; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 280.2 million; Market cap: $15.4 billion; Price-to-sales ratio: 2.4; Dividend yield: 1.9%; TSINetwork Rating: Average; www.mcgraw-hill.com) will soon split into two separate, publicly traded companies.

One of these new firms, McGraw-Hill Financial, will sell 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. Right now, this division supplies 60% of McGraw-Hill’s total revenue.

The other company, McGraw-Hill Education Inc., will publish textbooks for schools and colleges. It sells its products in 28 countries and 65 languages.

Special dividend will be tax-deferred

Investors will receive a special dividend of one common share of McGraw-Hill Education (New York symbol MHED) for every three McGraw-Hill shares they own. This will be a tax-deferred transaction: shareholders will not have to pay capital gains taxes until they sell their new shares. After the distribution, which will probably be paid by the end of 2012, each old share will become one McGraw-Hill Financial common share.

As a conglomerate, McGraw-Hill’s revenue fell 12.1%, from $6.8 billion in 2007 to $6.0 billion in 2009. That’s mainly because demand for its credit ratings fell during the credit crisis. Revenue turned around in 2010 and rose to $6.2 billion in 2011.

Earnings fell 28.6%, from $1.0 billion in 2007 to $739.9 million in 2009, but rebounded by 19.6% to $884.6 million in 2011. Due to fewer shares outstanding, earnings per share fell 21.6%, from $3.01 in 2007
to $2.36 in 2009. Earnings per share then jumped 23.3%, to $2.91, in 2011.

Profitable expansions will continue

Meanwhile, the two new companies continue to expand their operations. For example, Standard & Poor’s has formed a joint venture with CME Group (Nasdaq symbol CME) and Dow Jones & Co. This new business, called S&P Dow Jones Indices, owns over 830,000 financial market indices, including the S&P 500 and the Dow Jones Industrial Average. McGraw- Hill Financial owns 73.0% of this venture, CME owns 24.4% and Dow Jones owns 2.6%.

In addition, the education business recently paid an undisclosed sum for Key Curriculum, a private firm that makes software for teaching math. Key’s expertise will enhance McGraw-Hill Education’s other software products.

Breakup has helped unlock value

The stock has gained roughly 40% since the company announced the breakup in September 2011. Even after this jump, it still trades at a reasonable 16.4 times McGraw-Hill’s projected 2012 earnings of $3.35 a share.

The two new companies intend to pay a dividend, but have yet to set a rate. Meanwhile, McGraw-Hill will continue to pay quarterly dividends of $0.255 a share until the breakup, for an annualized yield of 1.9%.

McGraw-Hill is a buy.