Publishing powerhouse Pearson raises its sales, profits and dividend once more.
Investment guru Peter Lynch once remarked: "Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business."
More than anything, what we as investors want is to buy into high-quality businesses that share their financial success with shareholders. I would certainly put publishing giant Pearson (LSE: PSON) into this category.
Pearson powers ahead
With origins dating back to 1724, Pearson has a long and proud pedigree. Today, it is a world leader in educational publishing, as well as being the publisher of Penguin books and the Financial Times.
What's more, Pearson has been a terrific investment for its owners. In fact, by raising its latest full-year dividend by 9% to 42p, Pearson has increased its annual payout to shareholders for 20 years in a row.
In its 2011 results released this morning, Pearson revealed sales rose 4% to nearly £5.9 billion last year. The group's operating margins rose by one percentage point to reach 16.1%. Together, these improvements helped to boost operating profit by 65% to more than £1.23 billion, with profit before tax soaring 72% to £1.16 billion.
However, basic earnings per share (eps) dived 26% to 119.6p from 161.9p. Then again, excluding exceptional items, adjusted eps rose by 12% to 86.5p.
Alas, at £983 million, operating cash flow was 7% lower than in 2010 and free cash flow fell 15% to £772 million. This contributed to net debt rising by 16%, from £430 million to £499 million.
In addition, Pearson's return on capital slipped from 10.3% in 2010 to 9.1% in 2011, largely due to "significant acquisition spend and higher cash tax". Even so, this is still comfortably above its cost of capital.
Thus, although sales, margins and profits are moving in the right direction, the company should concentrate on lifting its cash flow in 2012.
Going for growth
Despite its background as a traditional publisher, Pearson has firmly embraced the digital age. Indeed, digital revenues grew 18% last year to £2 billion, a third of total sales.
The number of students using Pearson's digital learning programmes is up 23% to 43 million. Also, eBook sales at Penguin have more than doubled, rising 106% to contribute 12% of Penguin's total revenues. At the 'pink paper', digital subscriptions to the Financial Times leapt 29% to 267,000, representing 44% of total paid circulation, although advertising revenue was weaker.
Pearson is also enjoying a boost from emerging economies, with revenue from developing markets rising 24% to $1 billion, or a ninth (11%) of total sales.
What's more, thanks to the firm's low net debt, it has earmarked £500 million to invest in new products and technologies, plus "approximately £1bn of headroom [is] available for bolt-on acquisitions".
Pearson peers ahead
Looking ahead, the FTSE 100 firm "expects to achieve continued sales and operating profit growth in 2012, in spite of tough trading conditions and rapid industry change". What's more, chief executive Marjorie Scardino predicts that -- for the first time ever -- digital and services revenues will exceed revenues from traditional publishing businesses this year.
As I write, Pearson shares have slipped almost 4% to £12.03, valuing the group at over £9.8 billion. At this price, its shares trade on a forward price-to-earnings ratio of 14.5 and offer a prospective dividend yield of 3.6%, covered 1.9 times. Although these shares aren't cheap, they represent fair value for a well-run world leader.
In my view, Pearson is an excellent example of the best of British business. Despite nearly three centuries of trading, the group continues to innovate and plan for long-term change, while sharing its successes with its owners. Frankly, if I owned Pearson shares, I would stash them somewhere safe for the next 20 years!
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