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Is now the time to buy into this fallen FTSE 100 dividend angel?

It’s not been a straightforward ride for Pearson (LSE: PSON) over the past 18 months, but its soaring share price over that period, generated by more positive trading signals and evidence that restructuring measures were delivering the goods, had raised hopes that the education giant may be over the worst.

These expectations were punctured in mid-January, though, with the release of full-year financials in which the FTSE 100 firm advised that underlying sales dropped 1% in 2018. Investors were selling out in the run up to the release and have continued to do so, meaning that Pearson has shed around 20% of its value in little over two months. So do I think the price is right to buy in?

Clipped wings

A quick recap: Pearson had a reputation as a dependable dividend grower and a carrier of formidable yields up until 2016, its appeal as an income stock taking a hit when it was forced to freeze the full-year payout at 52p per share. The damage, though, really came the following year when it hacked the reward down to just 17p as its battered balance sheet and failing North American operations really hit home.

The education giant got onto the front foot again in 2018 by lifting the dividend to 18.5p as profits rose on the back of a one-off tax benefit and lower finance costs. And City analysts expect additional payout increases in the near term, even if they agree with Pearson’s estimates that adjusted earnings per share will drop to between 56.5p and 62p per share from 70.3p last year.

A 20.7p dividend is currently anticipated and this doesn’t seem an outrageous estimate given that it’s covered at least 2.7 times by expected earnings. This projection also yields an inflation-beating 2.5%.

Is it a buy?

That aforementioned share price weakness since the top of the year now leaves Pearson dealing on a forward P/E ratio of just 14.6 times. Does this dip provide a great opportunity for income hunters to grab a bargain?

I reckon not. It’s not that the company’s restructuring plans aren’t impressive, its aim to strip out costs running ahead of schedule and being on course to deliver annualised cost savings above £330m by the end of 2019.

It’s also not because Pearson isn’t making steps to put its struggles on the other side of the Atlantic behind it. Whilst investors may not have been impressed by the complicated terms of the $250m deal, the sale of its K12 courseware business to Nexus Capital Management last month finally rid the company of this failing North American business many months after putting it on the block and allowed it to concentrate more fully on its digitalisation plans.

Why am I so bearish? It’s due to the fact that the Footsie firm still has considerable exposure to the higher education markets Stateside, meaning that the revenues picture remains clouded by plummeting enrolment rates in higher education, rising competition in the textbooks market and the growing rentals segment. The move to become a major player in the digital market is the right way to go, but in the meantime, the worsening state of Pearson’s traditional markets will remain a major worry for the next few years at least. And for this reason, I reckon the Footsie firm should be avoided right now.

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Royston Wild 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.