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Why I wouldn’t buy shares in this FTSE 100 dividend stock

A global media conglomerate, the publisher of books, reports, periodicals, and screen-based services for professionals across the world, Pearson (LSE: PSON) is a well-known name in the industry. Presently, the company is at a stage where shareholders are questioning their investment. It saw a 41% fall in share price over the last five years. Over the last year, the stock performed poorly with the share price down by 23%.

Although Pearson became profitable within the last five years, its share price tells a different story. Other metrics will help better explain the move. Revenue of the company fell by 2.2% per year for the past five years. While the market gained 8.4% in the last year, the shareholders of Pearson lost 21%.

Revenue of Pearson stood at £4.13bn in 2018 as compared to £4.51bn in 2017. The net revenue has consistently declined over the past five years. Earnings per share was 75.60p in 2018 and the price-to-earnings ratio was 12.41. 

What about dividends?

Investors consider dividends as a source of income. The company has paid regular dividends for the past five years. Pearson offers a modest dividend yield of about 1.97%.  In 2018, the company paid £181.3 million in dividends and it had a negative cash flow for the year.

The educational publisher warned that the adjusted operating profit for the year will be at the lower end of its guidance range. Shares were down 16% after this announcement. Adjusted earnings per share are predicted to be at the bottom range of 57.5p to 63p. Revenue from US Higher Education Courseware, which contributes 25% to the total revenue, was down by 10% in the first nine months of 2019. It was mainly due to students returning to school turning away from print products sooner than anticipated.

Increasing competition

The biggest problem that Pearson is facing is a growing competition and the move of the industry towards online offerings. Back in the days of big capital investment in paper publishing houses and manufacturing of books, the large companies had an advantage with their financial clout and it helped maintain a defensive mat. However, the Internet is now helping smaller companies by lowering the barriers to entry. There are early signs of optimism in this case but they are turning out to be premature. The company is facing bouts of pain before anything works out and the share price valuation shows high optimism.

What does the future hold?

Pearson is optimistic about the future. It recently announced acquisition of Lumerit education. The deal is valued at $29 million and will address the needs of college degree completion and affordability in the consumer market. It is estimated that online education will significantly grow over the next ten years and this deal will give a strong market hold to Pearson. 

The company has bright plans and pays a dividend, but it does not justify the falling spree of the share price. The total shareholder return for the past five years is -28% and this gives a clear idea about the returns generated by the stock.  I do not think the valuation of Pearson offers enough margin to cover the risk.

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Vandita does not own shares in any company mentioned. The Motley Fool UK has recommended Pearson. 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.