The FTSE 100’s Hottest Dividend Picks: Pearson plc

Today I am looking at why I consider Pearson (LSE: PSON) (NYSE: PSO.US) to be a decent dividend stock.

Dividend yields beat the competition

Undoubtedly, the effect of a difficult transformation programme has had a hugely damaging effect on publishing group Pearson’s investment appeal. But in my opinion, the business remains an attractive pick for those seeking lucrative dividend prospects, even though the firm still has much work to do on the restructuring front.

The owner of the Financial Times has continued churning out meaty year-on-year dividend growth during the past five years, even though 1503-ComputerScreen_MySCearnings have fallen in the past couple of periods. Indeed, Pearson has hiked the annual payout at a compound annual growth rate of 7.8% since 2009.

And although earnings are expected to decline a further 8% this year, based on broker consensus, the business is still expected to lift the dividend a further 4% to 50.1p per share. And forecasters reckon next year will mark a turnaround in the firm’s beleaguered earnings picture, with a 16% improvement expected to underpin a 5% dividend rise to 52.6p.

This year’s predicted dividend creates a mouth-watering 4.4% yield, easily outstripping a forward average of 3.2% for the FTSE 100 as well as a corresponding reading of 3.4% for the complete media sector. And this rises to 4.6% for 2015.

Reshaping measures taking off

When looking at conventional metrics, Pearson may not be considered the most secure dividend contender on the market, however. Dividends are covered 1.4 times by predicted earnings through to the close of next year, some way off the safety benchmark of 2 times or above.

Meanwhile, the financial strain on severe restructuring is also playing havoc with the firm’s capital position — cash and cash equivalents rang in at £433m as of the end of June, down from £654m at the same point in 2013. Pearson intends to fork out £50m in net restructuring costs in 2014 alone, with a further £50m dedicated to organic investment.

However, the firm’s decision to hike the interim dividend 6% this month to 17p per share underlines the confidence that the firm has in its ambitious transformation plan. The firm is pulling out all the stops to reinvent itself for the digital age, putting a greater emphasis on online and services and moving away from traditional publishing. And these measures appear to be slowly taking off — sales edged 2% higher during January-June at constant exchange rates, to £2.05bn.

With the company also ploughing vast sums into expanding its presence in developing markets, I believe that a reshaped Pearson has the potential to offer exceptional growth and income prospects in coming years.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.