Why I would sell this FTSE 100 stock for this 8% yielder

Royston Wild looks at a FTSE 100 (INDEXFTSE: UKX) dividend in peril, and another blue-chip set to keep delivering delicious shareholder returns.

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Most eyes have been on Royal Bank of Scotland on Friday following all-new trading details, and rightly so — the semi-nationalised bank announced today that it had chalked up profits for the first time in a decade.

But fellow Footsie share Pearson (LSE: PSON) also impressed the market with fresh news on its own turnaround story.

Underlying revenues at the educational materials specialist may have ducked 2% in 2017, to £4.5bn, but this was an improvement from the 8% fall chalked up in 2016. The FTSE 100 business said that the fresh fall was “due to a decline of 4% in North America partly offset by stabilisation in Core and Growth.”

However, thanks to a lack of impairments this time around in its North American marketplace, Pearson was able to swing back into profit to the tune of £421m, a huge departure from the £2.6bn loss punched in the previous year.

Pearson was, as expected, forced to take the hatchet to dividends though, resulting in a full-year payout of 17p per share versus 52p in 2016.

Troubles remain

The London business has thrown the kitchen sink at resuscitating its troubled bottom line, and its efforts to digitalise its operations are showing signs of early progress. US higher education digital courseware revenues rose 9% last year.

Meanwhile, in more good news, Pearson declared that streamlining at the business is also “making faster progress than expected in some areas.” And so it confirmed that it remains on track to deliver £300m worth of annualised cost savings by 2020.

But the company still has a long way to go before it can proclaim its recovery plan a success. Indeed, it is touting a further fall in adjusted operating profit in 2018, to £520m-£560m from £576m last year and £635m the year before that, and this is little surprise as the crushing impact of falling demand for its print textbooks in the US looks set to persist in 2018 and beyond.

City analysts are predicting a 7% earnings decline this year, but for Pearson to bounce back with a 17% profits improvement in 2019. I remain to be convinced however, and reckon a forward P/E ratio of 14.1 times does not reflect the hard yards it still has to make to start generating meaningful earnings growth.

Safe as houses

I would be far happier to sell Pearson and to splash this cash into Barratt Developments (LSE: BDEV).

A slowing UK economy, rising construction costs, and uncertainty over the government’s Help To Buy scheme means that Barratt is not without risk itself. That said, I believe Barratt is on much safer footing than its FTSE 100 comrade, as the painful housing shortage that is driving demand for new-build properties is unlikely to disappear any time soon.

And so profits are likely to continue booming across the housebuilding sector, a view that is also shared by City analysts. Barratt itself is anticipated to report earnings growth of 5% and 6% in the years to June 2018 and 2019 respectively, feeding through to predictions of further dividend growth.

Last year’s 41.7p per share dividend is expected to rise to 43.3p this year, and again to 44.8p in fiscal 2019. Consequently Barratt boasts enormous yields of 7.9% for this year and 8.1% 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.

Royston Wild owns shares in Barratt Developments. 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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