As the Pearson share price gets a Q3 boost, should I buy?

The Pearson share price has been having a good run in 2024 so far. And the company’s Q3 performance is giving it another lift.

| More on:
Investor looking at stock graph on a tablet with their finger hovering over the Buy button

Image source: Getty Images

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.

The Pearson (LSE: PSON) share price is up 15% so far in 2024. And it had a nice boost from a Q3 update on Tuesday (29 October).

CEO Omar Abbosh told us that “our focus on operational and financial performance has driven growth across all divisions this quarter and we are on track to meet full-year expectations.

Shares in the education and publishing giant gained 3% in early trading, with the price up 5.8% since last Friday’s close.

What to watch for

The company expects to hit full-year market expectations. That suggests about 55.8p in earnings per share (EPS), and a price-to-earnings (P/E) ratio of 19.7.

Forecasts indicate more than 67p in EPS by 2026, to drop the P/E to around 16.

The forecast dividend yield is only 2.2%, rising to 2.6% based on 2026 forecasts. Investors seem unlikely to be eyeing up Pearson as an income stock. At least, not in the short term.

But EPS looks set to cover the dividends by about 2.3 times in the next few years. So there might be room for a future dividend focus if the firm’s earnings growth plans come good.

Strong cash flow

Pearson reported underlying sales growth of 3% in the first nine months. And it seems to be picking up, with a 5% rise in Q3. But how might it convert to the folding stuff?

For the full year, the board expects cash flow conversion of 95%-100%. That’s one of the things I look for in a dividend stock, even if the current yield is modest.

Many companies have recorded what look like impressive earnings over the years. But not all have been able to convert enough into actual cash. And shareholder income has suffered in the long term.

Pearson has also completed its £500m share buyback, hoovering up 7% of its issued shares. That’s a significant portion, and it should hopefully provide a material boost for future per-share measures.

AI in education

My main concern at the moment is the fairly high valuation. And it’s at a time when a lot of FTSE 100 stocks still look very cheap, with plenty of big dividends around.

I’m also thinking of artificial intelligence (AI), which Pearson is making increasing use of. To me, it feels like it might be a bit of a double-edged sword.

The company is “scaling AI across our products and services,” and spoke of “double-digit year-over-year billings growth in Higher Education products with AI study tools.

That sounds great, and this seems like a business where AI could really have a serious impact. But at the same time, are investors buying in just because AI is mentioned? And maybe pushing the price up a bit?

On the fence

Pearson is in a highly competitive market. And cheaper (and even free) AI learning tools could yet throw a spanner in the works.

But, I do think Pearson’s whole offering is more than the sum of the parts. And we could see a growing competitive advantage. I’m undecided on whether to buy, but I’m watching (and thinking).

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Pearson Plc. 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

Young female analyst working at her desk in the office
Investing Articles

Here’s how I’d target a £23k second income with £300 a month

If I was building a shares portfolio today, here's how I'd go about it. With these strategies I stand a…

Read more »

Investing Articles

Tesla stock, MicroStrategy: here’s what Hargreaves Lansdown investors bought last week

MicroStrategy and Tesla stock were among the most popular investments last week as Donald Trump boosted markets with his election…

Read more »

Investing Articles

1 AI stock worth considering now Stocks and Shares ISAs are safe!

The Budget brought good news for those of us with Stocks and Shares ISAs! I’ve been looking at this one…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Growth Shares

Up 41% in 1 year, I’m buying more of this growth trust for my Stocks and Shares ISA

A great performance over the last 12 months has pushed our writer to buy more of a very exciting investment…

Read more »

Investing Articles

3 reasons to like the Legal & General dividend

Christopher Ruane explains a trio of reasons why he likes the Legal & General dividend as a source of passive…

Read more »

Investing Articles

Down 16%+, here’s 2 unloved FTSE 100 shares for savvy investors to consider!

These FTSE 100 shares have slumped in the past six months. Royston Wild thinks long-term investors should pay them close…

Read more »

Girl buying groceries in the supermarket with her father.
Investing Articles

Down 15%, but the FTSE 100’s J Sainsbury has a dividend yield over 5%!

Is it time to consider shares in FTSE 100 supermarket chain J Sainsbury for a potentially enduring stream of chunky…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
US Stock

Should I buy Palantir stock for my ISA after a 200% gain?

Edward Sheldon has cash to deploy within his ISA. Should he buy Palantir shares for more exposure to the artificial…

Read more »