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Why Pearson is a FTSE 100 stock that could help you quit your job

Pearson (LSE: PSON) shareholders have endured a slump that saw 60% of its share price wiped out between March 2015 and a low point in September last year.

But Friday’s first-half figures appear to show fruits of a strengthening recovery, with the education publisher saying it expects “to deliver underlying profit growth in 2018” after posting a 2% rise in underlying sales growth and a 46% jump in underlying operating profit.

These figures were slightly ahead of expectations, boosted by the success of the firm’s higher education course materials in the USA and its online offerings. But adjusted operating profit at Penguin Random House dropped by 4%, and the company experienced the expected declines in its Learning Studio products and from its South African business.

On the sales and profit front, I see these results as a bit of a mixed bag. But there are some key measures that leave me feeling optimistic.

Balance sheet

Net debt rose over the half, by £432m from December to £775m by June. But that’s largely down to seasonal variations in business, and it’s significantly lower than the figure of £1,633m recorded at the same stage in 2017. In all, I really don’t see any balance sheet problems here.

The interim dividend edged up a little too, from 5p last year to 5.5p, which seems like a sign of confidence.

Chief executive John Fallon admits “there is still much to do,” and he’s clearly right. But I’m liking what I see. Dividends are only yielding around 2% after being slashed last year as part of the recovery plan, but they’re well covered and a new progressive run could see decent yields in a few years.

I’m also optimistic about a forecast 11% EPS rise for 2019, and I can see the share price doing well over the next couple of years.

Bigger dividend

While Pearson dividends might take a little while to get back to full strength, there are plenty of big yields to be found in the FTSE 100 today. Utilities shares are looking out of favour, and falling share prices have been pushing dividend yields up.

Look at SSE (LSE: SSE), for example. An 18% price dip over the past two years has pushed the forecast dividend yield for 2019 up to 7.2%. Analysts expect earnings per share to dip by 3% this year and 2% next, dropping the 2020 dividend a little to 6.5%.

But a 6.5% yield during a two-year down spell still looks like an income seeker’s dream to me, especially from a company with a good track record of paying around 6% per year.

What gains?

To put that into perspective, a regular 6% dividend yield would double your investment in 12 years, even without any share price gains.

And all that’s needed for share price appreciation too is for earnings to grow modestly over the long term. Even just a 3% rise in the share price per year would bring that doubling period down to eight years — and even less if you reinvest your dividends in new shares every year.

My colleague Rupert Hargreaves has offered his thoughts on why SSE has been out of favour recently, pointing to the merger with NPower and government price caps. Like him, I see SSE investing wisely for the long term, and I reckon the shares are cheap now.

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Alan Oscroft has no position in any of the 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.