To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.
So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at Pearson (LSE: PSON) (NYSE: PSO.US), the publishing company.
With the shares at 1148p, Pearson’s market cap. is £9,418 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 4,811 | 5,140 | 5,663 | 4,817 | 5,059 |
| Net cash from operations (£m) | 718 | 819 | 1,006 | 872 | 776 |
| Adjusted earnings per share | 57.7p | 65.4p | 77.5p | 86.5p | 84.2p |
| Dividend per share | 33.8p | 35.5p | 38.7p | 42p | 45p |
An investment in Pearson is an investment in the fortunes of the education sector, which delivers around 90% of the firm’s ongoing operating profit. Education sales in the US earn the company 64% of its profits and 26% comes from education around the world. The remaining 10% comes from professional publications and the well-known Financial-Times brand.
The directors expect a challenging 2013 with issues to deal with such as pressures on education budgets and college enrolment numbers, and a shift in the firm’s business model from print sales to digital subscriptions. A restructuring-spend of £150m is targeted for the year, although that investment should generate some on-going cost savings.
Investors will find out more about how things are going with the interim results due at the end of July.
Pearson’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: adjusted earnings covered last year’s dividend almost twice. 3/5
2. Borrowings: net debt is running at around 2.6 times the level of operating profit. 3/5
3. Growth: cash flow provides strong support for flat-looking revenue and earnings. 2/5
4. Price to earnings: a forward 13 compares well with growth and yield expectations. 4/5
5. Outlook: satisfactory recent trading and a cautiously optimistic outlook. 3/5
Overall, I score Pearson 15 out of 25, which inclines me to be cautious about the firm’s potential to out-pace the wider market’s total return, going forward.
Foolish Summary
Pearson faces headwinds and I think that shows in the muted figures against most of the indicators. On a positive note, the valuation seems undemanding and the shares offer a forward dividend yield around 4.4% at the current level. That’s attractive, but I’m keeping Pearson on watch for now.
But I’m excited about an idea from the Motley Fool’s top value investor who has discovered what he believes is the best income generating share-play for 2013. He set’s out his three-point investing thesis in a report called “The Motley Fool’s Top Income Share For 2013”, which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star, click here.
> Kevin does not own shares in Pearson.
