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Pearson - better than expected end to the year

Underlying sales rose 5% to £3.8bn at the full year, ignoring the effect of exchange rates and changes to the business structure.

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Underlying sales rose 5% to £3.8bn at the full year, ignoring the effect of exchange rates and changes to the business structure. This was driven by growth in all divisions apart from expected declines in Higher Education. The return of exams helped Assessment & Qualifications, while resumed travel helped Pearson Test of English volumes improve.

Underlying operating profit was 11% higher at £456m, reflecting the higher revenue and the positive effects of its more efficient platforms. Overall group performance has been better than expected.

Free cash flow of £222m was up from £133m, while net debt was £207m higher at £557m. The increase reflects the bigger share buyback and dividends.

The group expects underlying operating profit to be in-line with market expectations of around £585m in the new financial year.

A final dividend of 14.9p was proposed, taking the total to 21.5p for the year.

Pearson shares fell 2.4% following the announcement.

View the latest Pearson share price and how to deal

Our view

Pearson is a very different company to a few short years ago. The education and learning specialist has had a laser-like focus on reducing its reliance on physical teaching and learning materials, which are in decline.

The transition to digital is well underway and margins are following suit. Wider improvements have been achieved by some well-suited acquisitions, as well as organic growth through its own efforts. These include, focusing on direct-to-consumer business and slimming the group's physical footprint.

The successful pivot to digital allows more revenue to drop straight through to profit and crucially, cash flow. This gives Pearson room to pay dividends and return more to shareholders via share buybacks. The dividend looks well supported by earnings and we think there's scope for growth as things stand. Please remember no dividend is ever guaranteed.

Looking to the short-term, times of economic difficulty are often seen in conjunction with people upskilling, which is a structural opportunity for Pearson.

While we're happy Pearson's on the right track, and the turnaround plans are coming good, we're keeping an eye on a couple of points. It's unclear how much the group will benefit from a return to more normal teaching and exams. At the moment the uptick is promising, but they were starting from a very low base because of the pandemic. Much of the group's revenues are still anchored to physical teaching and testing. Demand for physical textbooks has been on the decline for years and that isn't going to reverse.

It's very tough to map exact demand because we don't know what post-pandemic normal really looks like yet. A higher-than-expected proportion of people could re-pivot back to traditional learning and teaching products when things settle. This isn't something we see definitely happening, but it's a dynamic to watch.

As the strategic pivot continues, we're mindful that budgets and margin projections can turn at short notice too, particularly in an inflationary environment.

Pearson is putting in a good showing, and we're feeling more positive that it can convince customers to stick with its digital shift. The price to earnings ratio is slightly higher than the ten-year average, reflecting confidence from the market, but also increases the risks of ups and downs.

Pearson key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 3rd March 2023