Is a rebound around the corner for this fallen dividend champion?

Should you buy this fallen dividend champion on its turnaround prospects?

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Education publisher Pearson (LSE: PSON) today announced that it is set to raise approximately $1bn from the sale of a 22% stake in Penguin Random House to its partner Bertelsmann.

News of the sale initially sent its shares up by more than 3% in early morning trading, as the company said that it intends to use £300m from the sale to buy back shares, with the remainder earmarked to bolster its balance sheet.

But its shares have since fallen back as investors weighed management’s comments on the firm’s new dividend policy, and by early afternoon, they were down by as much as 8%. As such, Pearson shares are on course for their biggest daily decline in three months.

Dividend cut

Although the company has yet to spell out its new dividend plan, management indicated that it would give more priority to its balance sheet and investment required to transform the business, in light of the current challenging market environment. Additionally, it would not use the income from its remaining 25% stake in Penguin to make future dividend calculations.

This marks an end to its progressive dividend policy, after 25 years of consecutive annual dividend increases.

Structural issues

The sale also does not change the structural issues affecting the group’s struggling education business in North America, but instead, increases its exposure to the under-performing division. As such, the publisher’s bottom line performance would become even more dependant on a recovery at its core business.

Unfortunately, Pearson’s lacklustre dividend plans indicate that a turnaround is far from imminent. City analysts seem to share that opinion, as they expect underlying earnings this year to fall by 17%. And with shares in the company trading at 14.1 times forward earnings this year, I don’t think there’s enough upside to play for.

Revenue miss

In other news today, household and personal care products company McBride (LSE: MCB) said it expects adjusted operating profit for the full year to be in line with previous expectations, despite challenging trading conditions in the second half.

Total group revenues, in constant currency terms, fell 5.9% from the prior year. The decline was mostly due to weaker demand, which caused underlying revenues to drop 3.8%, while McBride’s customer reduction project accounted for a further 2.1% of sales reduction.

Leaner cost base

Yet the firm continued to make steady progress on the cost saving front, and as a result of this, its leaner cost base was considered effective in mitigating the impact of competitive markets and raw material price inflation.

Encouragingly, McBride said in today’s update that management remains confident in the execution of its restructuring plan and is pleased with the progress to date. This confidence also seems to be shared by City analysts, as they expect underlying earnings-per-share to rise by 19% this year, with a further gain of 17% in 2018.

So in spite of today’s revenues miss, I reckon that fundamentals remain broadly intact. As such, I believe valuations are tempting, with shares in the company trading at just 12.1 times its expected earnings for 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.

Jack Tang 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.

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