2 reasons to stay away from Pearson plc

Bilaal Mohamed explains why he remains wary of Pearson plc (LON:PSON).

| 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.

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.

Back in November I advised investors to steer clear of publishing giant Pearson (LSE: PSON) as I sensed the thinly covered dividend was under threat if earnings didn’t improve. But was I right to advise investors to look elsewhere for more secure income, or have I been left with egg on my face?

Lucky escape

It seems as though I’m off the hook. Further bad tidings were yet to come for Pearson in the form of a profit warning in January which sent the shares crashing 29% to 573p in a single day. Ouch! These were levels not seen since 2008 when Prime Minister Gordon Brown was busy tackling the financial crisis. So a lucky escape for those of you who shared my concerns and ignored the seemingly attractive dividend.

Full-year results were to follow in February, with the revelation of a massive £2.56bn pre-tax loss for 2016, compared to a £433m profit the previous year, with sales falling 8% to £4.55bn in underlying terms. This was blamed on expected declines in US and UK student assessment and US school courseware, and a much worse than expected decline in North American higher education courseware.

Dividend cut?

Pearson’s shareholders have been suffering for quite some time, with the share price now 58% below its 2015 peak of 1,508p. But until now the generous dividend provided some solace. Despite the poor results, management decided to maintain the full-year dividend at 52p per share, saying they will rebase it from 2017 onwards. Folks, that’s a polite way of saying it will most likely be cut. So that’s one reason why I think investors should continue to stay away.

Pearson’s CEO John Fallon has vowed to accelerate the company’s transformation programme, simplify its portfolio, control costs, and focus on investment in its biggest growth opportunities in education. But earnings have been in decline since 2011, and despite the ongoing digital transformation programme, this trend is set to continue with analysts expecting profits to shrink by a further 16% during the course of 2017. That’s the second reason why I continue to be cautious.

The share price has staged a reasonable recovery since the January sell-off, but is still 25% lower than a year ago. However, lower earnings forecasts mean that a P/E ratio of 13 is nowhere near cheap enough to tempt me to buy Pearson as a long-term recovery play.

Growth Acceleration Plan

If you’re still looking to gain exposure to the media & publishing sector then perhaps a better alternative to consider would be Informa (LSE: INF). The London-based international publishing and events group is continuing to make good progress with its ‘2014-2017 Growth Acceleration Plan’. Its improved operating performance is supported by strong returns from acquisitions and favourable currency trends.

Informa has a good track record of steady earnings growth and I remain bullish on the group’s long-term prospects with an increasing proportion of recurring and predicable revenues coming from subscriptions and exhibitions. The valuation is also reasonable with the P/E rating dropping to 13 next year.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How many National Grid shares must I buy for a £100 monthly second income?

I think National Grid could be one of the safest options for investors seeking a dividend income. And today its…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

NIO stock is down 90%. Will it recover?

NIO stock has fallen significantly from its 2021 all-time high. But could now be a chance for this Fool to…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 UK shares could help me reach £1,000,000 in my Stocks and Shares ISA

A FTSE 100 compounding machine and a FTSE 250 value stock are the UK shares Stephen Wright thinks could help…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

If I’d invested £1,000 in Lloyds shares at the start of the year, here’s what I’d have now

The stock market is unmoved, but Stephen Wright thinks last year’s record profits might give Lloyds shares a long-term boost.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I’ll snap up shares in this growth stock in March if others don’t get there first

This Fool says shares in this growth stock are stable, full of profit, and might be undervalued. But there are…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

My 2 top energy investment trust picks for a passive income

I'm aiming to buy more of these investment trusts for a passive income and the reasonably stable energy sector returns…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

5.5% dividend yield! Shares like these could be great for my retirement

Oliver Rodzianko thinks this company with a stellar dividend yield could be very useful when looking for income from his…

Read more »

Investing Articles

Should I buy this FTSE 250 stock as it soars back to the FTSE 100?

This FTSE 250 stock has rallied following its pandemic woes. This Fool thinks now could be a good time to…

Read more »