The media giant shrugs off the downturn, so another dividend hike is on the cards.
The past four years have been pretty tough for British businesses.
First came the credit crunch in August 2007, followed by the longest and deepest economic recession since the Great Depression. Now, thanks to falling disposable incomes and low consumer confidence, the UK seems to be stuck in a rut of low growth.
Pearson powers ahead
However, not all British companies have suffered and struggled since the credit and housing bubbles burst in 2007. Indeed, recent results from a few high-quality firms clearly demonstrate their ability to grow their profits, even in these tough times.
For example, take Pearson (LSE: PSON), best known as the publisher of the Financial Times and Penguin books. As well as being a leading business publisher, the FTSE 100 firm also owns the world's largest publisher of educational materials.
This morning, Pearson unveiled another strong trading update, despite 'weak' market conditions. Growth was largely driven by digital services, emerging markets and changes to Pearson's business portfolio. Recent trading at all three key divisions -- North American education, the Financial Times and Penguin -- has been "good" to "strong".
In 2011, Pearson generated around £2 billion of digital revenues, plus £600 million from developing economies. As a result, it expects full-year earnings per share (eps) to exceed its forecast of 83p. The group now expects eps to come in roughly 10% ahead of the 77.5p reported in 2010, which would be a shade over 85p.
What's more, Pearson generates approximately three-fifths (60%) of its sales in the US. Thus, it has benefited from a 5% strengthening of the pound against the dollar, adding perhaps 1.3p to eps. In addition, the publisher benefited from a lower interest charge (£55 million) and a lower tax rate (at the bottom end of the expected range of 22% to 24%) in 2011.
Delightful dividends
As a leader in its field, Pearson shares its success with its shareholders. Indeed, if its dividend rises this year, then it would be the 20th yearly increase in a row.
Furthermore, rather than slowing down during the ongoing financial downturn, Pearson's dividend growth is actually accelerating, as this table shows:
| Calendar year | Dividend per share | Yearly increase (%) |
|---|
| 2011 | 39.7 | 9.4% |
| 2010 | 36.3 | 6.1% |
| 2009 | 34.2 | 5.9% |
| 2008 | 32.3 | 8.0% |
| 2007 | 29.9 | 8.7% |
| 2006 | 27.5 | 7.0% |
| 2005 | 25.7 | 4.9% |
| 2004 | 24.5 | 3.4% |
| 2003 | 23.7 | 4.4% |
| 2002 | 22.7 | |
Since 2002, Pearson's yearly dividend has increased from 22.7p to 39.7p, up by three-quarters (75%). Thus, over the past nine years, its cash payout to shareholders has increased at a compound rate of 6.4% a year, which has easily thrashed inflation.
Paying for quality
As I write, Pearson's share price is down 3% at 1,207p, which values the FTSE 100 firm at just short of £10 billion. This puts the publisher on a forward price-to-earnings ratio of 15 and a prospective dividend yield of 3.5%, covered twice.
While this is a fairly lofty valuation, I've said before that Pearson's quality justifies a premium rating. Hence, despite their lofty levels, I would be glad to own its shares -- not least because I am an FT author!
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