Pearson Gets Picked

Stephen Bland selects Pearson as the next share for his third high yield portfolio.

This article marks the end of a minor era. My value series has for an extremely long time, as a proportion of total Fool history, been published on Fridays. From now on it goes up on Wednesdays. A bit like dumping an old girlfriend and embracing a new one, it required a certain amount of psychological readjustment on my part because my whole life had hitherto been geared to the Friday delivery.

So from now on the first Wednesday in the month will mark the latest addition to HYP3, the high yield portfolio that I am constructing by monthly additions and in which I am permitting myself the luxury of being able to trade on occasion. This is in contrast to HYPs 1 and 2 which are eternity portfolios.

Share 14 is Pearson (LSE: PSON) . Another very large cap and at £5.9bn about half way down the FTSE 100, it takes the portfolio into a new area of diversification. The company is in the official sector of Media, being a publisher with such well known titles as the Financial Times, Investors Chronicle and Penguin Books plus a substantial educational publishing business.

Regular readers of my HYP articles will know that I don't believe in close examination of a company's figures beyond a very few basic details to confirm that the share is a suitable choice. Additionally I make no attempt at any long term prognostication of the business. I don't know, I don't want to know and I cultivate and pride myself on that attitude. I even gave it a buzzword title - Strategic Ignorance. What is important is that an HYP is strongly sector diversified and Person represents a new direction for this portfolio.

Here is the current standing of the portfolio so far.

For the year to 31/12/05 the company paid dividends of 27.0p. The consensus forecast for 06 is 28.4p and 07 29.9p. On the 06 forecast then, the expected yield at my above buying price is about 3.9% rising to around 4.1% for 07. These compare with the current average for the FTSE100 which is in the region of 3.3%.

Recent actual years and the forecasts show dividends increasing at approximately 4-6% annually, which is above inflation and therefore highly desirable for a HYP share. Interestingly the forecast divis are anticipated to rise at a slower pace than eps, consequently expected cover will rise somewhat though at an actual historical 1.29 for 05 rising to 1.46 for 07, it's not spectacularly high so any increase is welcome.

Don't forget that these are merely forecasts upon which no great reliance should be placed. Rather, see them as a rough guide to the very short term future which helps the decision making process. Long term, strategic ignorance rules and I have no idea, and I don't want to have any idea, where Pearson is going.

Gearing of 30% at the last annual accounts of 31/12/05 is modest and down a lot compared with earlier years. However that figure is against all net assets. Deducting the very large intangible element to arrive at net tangible assets produces a negative figure of the latter. Note though that this not unusual in media based businesses so I don't see it as anything to worry about for this HYP.

HYP3 is now approaching completion, at least if compared with the other HYPs I've set up here which all contained fifteen shares at the outset though there is nothing particularly meaningful about that figure. I wouldn't advocate fewer for most investors but some more might be worthwhile. It really depends upon market yields at the time of selection, whether there are any additional sectors I wish to see represented and so on. Thus I'm not fixing in advance the number of shares I'll stick into HYP3 but it is unlikely to be more than twenty.

Of the shares shown Stephen owns Alliance & Leicester, BT, DSGI, Lloyds TSB and United Utilities.