Pearson PLC (PSO, Financial) is a British educational company that has sold off much of its newspapers. Morgan Stanley (MS, Financial) has put out an excellent report on why it likes the company. The stock yields over 7%, and management has repeatedly stated the dividend is safe.
There are 822 million shares, and the company trades at a market cap of $8 billion. The dividend is 52 pence and the stock trades at a dividend yield of 7%. I’m going to put much of the data in pounds instead of dollars on the ADR because I don’t trust U.S. news sources for foreign data. Earnings per share were 1.012 pounds ($1.32 in U.S. currency) but on special items.
Sales were 4.468 billion pounds in 2015, down 2% from the prior year. Operating profit was 723 million pounds – about flat. Sales for the first half of 2016 were down 7% due to “expected declines in assessment revenues” meaning it is selling fewer books. Operating profits were down 72% to 15 million pounds. Last year, Pearson sold Power School for 222 million pounds, Financial Times for 858 million pounds, 50% of the Economist for 469 million pounds and some U.S. textbook publishers for 90 million pounds.
Pearson makes 63% of its sales in the U.S., 6% in China, 5% in Europe, 3% in Brazil, 2% in Canada, 2% in Australia, 1% in South Africa and 1% in India. It’s surprising what an American company Pearson is. Management’s goal is to be a major course publisher, focus on North America and reduce headcount.
An interesting division is Pearson VUE. This is a testing center for professionals. I’ve gone to many of these in my life: Series 7, 65, 63, insurance licenses. Of course this division will be tied to the strength of the overall economy, but I’d guess profit margins are pretty high. These testing centers also support health care, the military, government, IT and academia.
CEO John Fallon stated in an interview on CNBC that the company looks to make 800 million pounds in operating profits by 2018 and cost savings of 350 million pounds. He also said that 240,000 people are seeking online degrees in conjunction with Kings College in London. He guessed Pearson would make 580 million pounds to 620 million pounds in operating profits in 2016. Pearson English teaches people language skills. It looks like it could be for individuals or a benefit from human resources. I’d recommend that you listen to this interview on CNBC.
One tough business that Pearson is in is student testing for children. This is a political lightning rod. Many people feel that we spend too much time and energy making students take tests.
In an August report from Morgan Stanley, “College book retailers are entering the third quarter with low inventories, a potential positive factor for second-half Pearson revenue growth.” The report actually gave a great idea on why to invest in Pearson –Â in a weak economy, people go back to school. That’s a great idea! If you get laid off, get more education or switch careers. It makes sense. The report also noted that since the pound has been weak, it is good for Pearson because most revenues come from the U.S. and the dividend is safe. Thirty-five percent of sales are print. The report had a price target of 10.5 pounds when the stock was trading at 8.83 pounds at the beginning of August. It’s now trading at 7.55 pounds.
Another great thing about the Morgan Stanley report is that it breaks down why the market is worried about the stock in plain English. Basically, first-half revenue was down because college bookstores cut inventories when enrollment was down. They expect second-half revenue to be flat. Morgan Stanley estimates a 3% decline in college courseware in 2016.
Morgan Stanley gave seven reasons why it likes Pearson.
- Earns in dollars.
- Low exposure in U.K. and Europe.
- Cost savings of 350 million pounds.
- Play on economic slowdown in U.S. with people going back to school.
- Higher testing in 2017.
- Cost savings and revenue upturn in 2018.
- The dividend is sustainable.
The balance shows 1 billion pounds in cash to 115 million pounds in short-term debt, a 144 million-pound pension liability and 2.324 billion pounds in debt. Debt is rated BBB by Standard & Poor's. You can see that S&P thinks that Pearson is going to spend down a lot of that cash in acquisitions. I’d agree.
Looking at the stock, it’s been getting crushed. I hate to buy something when it keeps falling month after month, but that dividend is enticing. Also, its business is easy to understand. It's gotten out of newspapers and into teaching. Often times, there is money to be made in spinoffs and restructuring. This is not your parents’ Pearson –Â this is a new company with a new business model. I’m impressed with Pearson and the dividend. I might buy.
Disclosure:Ă‚ We do not own shares.
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