Pearson plc slumps 20%+ on profit warning and dividend cut

Pearson plc (LON: PSON) continues to endure a difficult period.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Education specialist Pearson (LSE: PSON) is among the biggest fallers today after it released a profit warning. The company has experienced a challenging fourth quarter of the year in its North American higher education courseware business and while its operating profit for 2016 is in line with guidance, 2017’s figures are now due to be lower than previously expected. Could this prove to be a buying opportunity, or is it a stock to avoid at the present time?

A difficult period

For 2016, Pearson expects to report adjusted operating profit of £630m despite an 8% fall in revenue. This has primarily been caused by the weakness within its North American higher education courseware business, with other business units performing as expected. Its net revenues within the North American higher education courseware business fell by 30% during the final quarter of the year, which meant they declined by 18% for the full year. Around 2% of this was caused by lower enrolment, 3%-4% by an accelerated impact from rental in the secondary market, and around 12% from an inventory correction.

Clearly, this news has caused investor sentiment to weaken. The company expects the difficulties experienced in the fourth quarter to continue into 2017. As such, operating profit is expected to fall to between £570m and £630m. For 2018, the company has withdrawn its operating profit goal due to portfolio changes and the uncertainty it now faces, which highlights the degree of difficulties being experienced. It will also rebase its 2017 dividend to reflect its updated earnings guidance.

An improving business

While today’s news is clearly disappointing, Pearson has made good progress with its turnaround plan. For example, it has delivered its 2016 restructuring programme in full and the financial benefits have been slightly higher than planned. It has the potential to make further progress in its strategy of accelerated digital transition, while also managing the decline in print and reshaping its portfolio. In the long run, such changes could improve the performance of the business, although its near-term future remains highly uncertain.

It may be prudent to avoid Pearson at the present time. It could be worth buying once more details are known regarding its future performance, but for now its shares look set to remain volatile and continue their downward trend.

Turnaround potential?

Of course, other media stocks are performing much better than Pearson, with Sky (LSE: SKY) being an obvious example. It’s due to record a rise in its bottom line of 18% in the next financial year, which puts its shares on a price-to-earnings growth (PEG) ratio of only 0.8. This indicates that Fox is buying the company on what is a very lucrative valuation. That’s especially the case since Sky is a much stronger and better diversified business following its merger with Sky Italia and Sky Deutschland.

Like Pearson, the company has experienced a difficult period and posted a fall in earnings in 2014 and 2015. However, it has delivered a strong turnaround since then. Pearson has the potential to do likewise, but it may take time for it to deliver rising profitability and a higher dividend.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Down 5%, Glencore’s share price looks a serious bargain to me now

Glencore’s share price looks undervalued to me, supported by strong earnings growth prospects and the potential resumption of extra shareholder…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’d invest £6,580 in this FTSE 250 REIT for £500 passive income

This FTSE 250 renewable energy enterprise is on track to become a Dividend Aristocrat! Here’s how I’d invest to earn…

Read more »

Investing Articles

Buying 1,000 of some dividend shares today unlocks £45 in weekly passive income!

These shares are among the biggest dividend payers in the FTSE 100. Should investors be buying them now to earn…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

If I’d put £5k in index funds 5 years ago, here’s what I’d have now

Investing in index funds is an excellent way to grow wealth with minimal effort. But how much money can investors…

Read more »

Investing Articles

10.2% yield! 1 of the top income stocks to buy in July?

A 10% yield's pretty rare, but this firm's been growing shareholder payouts for nine years! Does that make it one…

Read more »

Investing Articles

‘FTSE 100 to skyrocket to 10,000’! 1 cheap stock I’d buy before the surge

Analyst forecasts predict a massive surge for the FTSE 100 may be coming by April 2025! Should investors snap up…

Read more »

Investing Articles

My Taylor Wimpey share price prediction for the second half of 2024

Having underperformed the FTSE 100 from January to June, our writer reckons the Taylor Wimpey share price might enjoy a…

Read more »

Investing Articles

£10k in savings? Here’s how I’d aim to turn it into a £4,894 annual passive income with Aviva shares

Aviva might be one of the FTSE 100's hottest dividend shares right now. I'm banking on it to provide me…

Read more »