We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Pearson - full year expectations unchanged

Charlie Huggins | 29 April 2016 | A A A
Pearson - full year expectations unchanged

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Pearson plc Ordinary 25p

Sell: 596.60 | Buy: 597.20 | Change -7.00 (-1.16%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Pearson traded in line with expectations in the first quarter of its financial year. The shares fell slightly on the news. Continuing sales were down 4% in underlying terms, with declines across all three divisions (North America, Core and "Growth"). Lower revenues from the Assessments businesses in the US and UK, which are weighted towards the first half of the year, accounted for the bulk of the decline.

Pearson say they are making good progress with their simplification and efficiency programme announced alongside full year results. They still expect restructuring costs of c. £320m in 2016 and to generate annualised savings of approximately £350m, with £250m in 2016 and a further £100m in 2017.

They continue to expect to report adjusted operating profit of between £580m and £620m and adjusted earnings per share, before the costs of restructuring, between 50p and 55p, respectively for the full year. Profits will be even more second half weighted than usual given the recent disposals of the FT Group, The Economist Group and PowerSchool which together contributed £40m to operating profit in H1 2015.

Our view:

Pearson currently offers a yield of 6.4%. The group intends 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 only just covered by forecast earnings this year , investors have to treat this as a relatively high risk situation with significant uncertainties attached to future dividend levels.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.