FTSE 100 publisher and learning services provider Pearson (LSE: PSON) has endured a turbulent recent history, which is obvious in the dividend-slashing that carved around two thirds from the payment in 2017 following a series of profit warnings.
If we are buying the shares now, I reckon it must be for the firm’s recovery potential. But the emaciated dividend leaves a lot to be desired with the yield running at around 2.25% at today’s share price around 891p. So I wouldn’t be attracted to this firm as an income investment.
Working hard to turn itself around
Based on the numbers alone, it’s hard to for me to find any reason to buy the shares. City analysts following the firm expect earning to slide around 8% over the next couple of years, and the forward-looking price-to-earnings ratio for 2020 runs just below 14. This isn’t an obvious bargain, although the dividend payment does look set to rise a bit each year from here.
The full-year results today revealed that revenue came in down a little compared to the previous year and underlying profits were up a bit. The company is working hard on its cost-saving plan and investing in digital platforms with the aim of becoming what chief executive John Fallon described in the report as “a simpler, more efficient and innovative company.” He thinks sales will “stabilise this year, and grow again in 2020 and beyond.”
But I can’t work up any enthusiasm for the shares. I think the valuation already accommodates forward progress, and I’m not expecting operations to shoot the lights out with surprises to the upside. Yet there’s still all the single-company risk to carry if I do buy the stock, and let’s be honest, the firm has delivered plenty of downside surprises in the recent past.
I’d invest here instead
This is one of those many occasions when I’d rather invest in the market itself than in this individual share. A FTSE 100 tracker fund would be ideal for the purpose. And I think there’s a lot of advantage to be had from having a portion of my funds in the FTSE 100. A small part of my tracker fund would follow the fortunes of Pearson because it’s part of the index. So I’d capture the upside if Pearson goes on to stage a dramatic recovery and launches into a new phase of growth. But if Pearson fails to perform, or even if it declines in value and operations deteriorate, my exposure to the downside would be slight in a FTSE 100 tracker.
Another great thing is that the FTSE 100 index tends to be self-cleaning in the sense that really bad performing companies drop out of the index altogether and are replaced with companies with rising fortunes. I’m bullish on the prospects for the FTSE 100 Index looking at a five-to-10-year-plus investment horizon. And while I’m holding my tracker fund, the reinvested dividends it produces will help my investment to compound, although I will be expecting fluctuating capital values as the index rises and falls, which I’m comfortable with. In the long run, I think the investing outcome could be pleasing.
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Kevin Godbold has no position in any share 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.