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- Dividend maintained amid challenging conditions

George Salmon | 29 July 2016 | A A A
Pearson- Dividend maintained amid challenging conditions

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: 595.60 | Buy: 596.00 | Change 2.60 (0.44%)
Chart View factsheet

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

Shares in Pearson this morning fell by 5% after the company released interim results.

Pearson had guided for a low key first half, and sales duly fell by 7% in underlying terms to £1,866m, however analysts had been expecting better.

Operating profit of £15m is down £39m from last year, but is in-line with company expectations.

Net debt fell by £863m to £1,426m. Debt was reduced by the group's disposals, however this was partly offset by a weaker Sterling bumping up the value of Pearson's US denominated debt.

CEO John Fallon said that the group is making good progress on plans to simplify the company and return to growth. The group have given notice to 3,450 full time employees, as part of the plan to reduce headcount by 4,000.

Mr Fallon added that despite facing challenging conditions in their main markets, the group is trading in line with 2016 expectations and making progress towards longer term targets.

In 2016, Pearson continue to expect adjusted operating profit and adjusted earnings per share before restructuring costs of between £580m and £620m and between 50p and 55p, respectively. If current exchange rates prevail, a 4p EPS benefit can be expected.

The interim dividend is held level at 18p.

Our view

Pearson have had a tough time recently, and in the short term conditions look challenging in all their main markets. The group have highlighted falling college enrolments, lower demand for vocational studies and collapsing South African textbook demand for their current discomfort.

Pearson are restructuring sharply to focus efforts on the opportunity they see in interactive educational media. 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.

As part of the restructure, operating costs are being taken out of the business (headcount is set to fall by 10%) and non-core assets like the Financial Times and Economist newspapers have been sold.

The disposals have shored up the balance sheet, which should boost confidence in the dividend in the near-term. This is important as Pearson aim to avoid a cut during the restructure. However, the longer-term outlook on the dividend is dependent on the success of the restructure, and the profitability of the group's strategy.

One problem with their plans is that, even if they are right and the opportunity is there, they will face a threat from the volumes of free educational content that can be found online. If Pearson share this concern, they are keeping it to themselves.

The shares offer a prospective yield of close to 5 .5%. Therefore if things go well, and Pearson are able to use existing relationships to negate the online threat, investors can look forward to a high level of income in the medium term. The potential for longer term capital gains driven by an improved business performance is there too.

However, a turnaround is far from guaranteed, and with the dividend only just covered by forecast earnings this year, investors should not be counting any chickens yet.

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.