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Pearson - 'a year of progress'

George Salmon | 23 February 2018 | A A A
Pearson - 'a year of progress'

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Pearson plc Ordinary 25p

Sell: 708.60 | Buy: 709.00 | Change 8.80 (1.25%)
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Pearson's full year operating profit came in at the top end of its guidance range, with performance boosted by a lower tax rate.

The group also confirmed it is making faster than expected progress in some areas of its restructure. Total cost savings are still expected to be £300m by 2020.

The shares rose 3% on the news.

Pearson is proposing a final dividend of 12p, which results in an overall dividend of 17p (2016: 52p).

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Our View

Digital content is replacing paper the world over, and Pearson believes that will be the case in education too. The group is transforming itself from staid publishing house to trailblazer in the emerging world of digital education content.

The Economist and Financial Times are long gone, and a chunk of Penguin Random House recently followed them out the door. CEO John Fallon was confident that the proceeds from these sales would mean Pearson could cover the costs of the restructure and maintain the dividend while still emerging a leaner and more profitable organisation.

This sounded like an excellent outcome for shareholders, but the sales removed the main safety net should there be a wobble. You can probably see where this is going.

Rather than a failure to get to grips with online specifically, that wobble was the result of weak demand for traditional courseware in North America. Unfortunately for investors, the decline was of 'unprecedented' size, and Pearson had to revaluate its stance on holding the dividend steady.

While the group is still targeting a sustainable and progressive dividend, this is going to be from a significantly lower base. The dividend was sliced by two thirds from 52p to 17p at the full year stage. Going forward, the prospective yield is 2.6%.

Recent updates have brought more positive news. US sales are still slipping, but we're getting significant growth in the digital sphere. Competition from free online alternatives is said to be having less of an impact than the group had expected, and much less than sceptics had feared.

Nonetheless, we'd hesitate to say the shift to digital has been vindicated. Not only does the group still need to prove it can establish itself in this new sphere, it'll need to prove it can do so in a robustly profitable way.

The rewards could be great, but a few things need to go the group's way for those rewards to be realised.

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Trading details

As expected, North America (65% of revenues) was a tough market in 2017, with underlying sales falling 4% despite digital courseware revenue rising 9%.

Total underlying revenues declined 2% to £4.5bn as other Developed Markets (18% of revenue) and Emerging Markets (17% of revenues) both delivered a flat underlying performance.

Adjusted operating profit dropped 9% to £576m, but operating cash flow rose slightly to £669m. Dividends from the recently sold stake in Penguin Random House and good cash collections from customers helped offset extra outflows from a special £227m pension contribution, and £153m of share buybacks. A further £147m of shares have been repurchased this year, completing the £300m programme.

Higher cash flows, plus disposal proceeds, saw net debt fall from £1.1bn to £432m. Including leases and other items, net debt is now 2.1 times cash profits.

Looking ahead, the group is guiding investors to expect adjusted operating profit of between £520m and £560m next year, including an anticipated £80m benefit from the 2017-2019 restructuring programme. Guidance excludes restructuring costs of £90m.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.