Pearson has provided a year end trading update, along with a detailed strategic update. For 2015, adjusted operating profits are seen at circa £720m and earnings per share of 69-70p are expected to be announced, along with an unchanged final dividend, when the group issues full year results.
The group is taking further steps to restructure and lower costs, to better suit the current and expected trading environment. This will have a severe impact on reported and underlying profits for 2016, but a recovery is expected beyond that level, with adjusted operating profit in 2018 expected to be at or above £800m, which is slightly higher than the current market consensus.
Pearson intend to continue maintaining the current level of dividends whilst business performance is stabilised and improved, with growth in the dividend resuming once cover has improved sufficiently. This policy reflects the Board's confidence in the medium term outlook.
Adjusted earnings per share in 2016 are expected to be in the range of 50p-55p, excluding the costs of restructuring. After those charges, operating profits are expected to be in the £260m - £300m range.
Pearson attribute much of their recent trading difficulties to a fall in student numbers entering Higher Education in the USA as the economy offered more employment opportunities, a halving of the number of UK students taking vocational courses and a decline in the South African textbook market of 60%. Collectively, these factors reduced operating profits by £230m. The disposals of the FT and other businesses have further reduced profits by around £120m, whilst raising £1.8bn of capital.
On the current 52.0p dividend, the stock is yielding almost 8%.
Pearson shares rose 5% in reaction to the news that the dividend was to be maintained.
"Nothing yields eight" is an old market adage, meaning that a yield of that magnitude implies that the company is expected to cut its dividend. But Pearson is attempting to buck the trend, promising to hold its payment at the current level, whilst it restructures and rebuilds to the point where earnings have grown sufficiently to allow dividends to grow once more.
Pearson have highlighted falling college enrolments, lower demand for vocational studies and collapsing South African textbook demand for their current discomfort. What they have not talked about is one of the market's greatest concerns for educational publishing, namely the proliferation of free content online.
The concern has been that in markets like College, students might start to dispense with standard texts, in favour of freely available online resources. If Pearson share this concern, they are keeping it to themselves. What they are engaged with however, is a deep restructuring that will see a reduction of around 10% of headcount during 2016 as they rationalise, simplify and reallocate activities and resources.
The company is hoping for an eventual £350m per annum payback from the process, with the full sum realised in 2017. Pearson expect this, plus some improvement in their markets, to lead to a substantial recovery in profitability in 2017 and beyond.
The dividend policy is going to be dependent on this. If the restructuring goes to plan, and if Pearson's markets show the improvement they expect, then investors can look forward to a very high level of income in the medium term, with hopefully longer term capital gains driven by an improved business performance. But there are a lot of bridges to cross on this journey and with the dividend cover ratio at low levels, possibly less than 1x next year, investors have to treat this as a relatively high risk situation with significant uncertainties attached to future dividend levels.
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