The last five years have not been a good time to be an investor in education publisher Pearson (LSE: PSON) as the shares have fallen by over 50%. 2019 hasn’t been a great year for the share price either with the shares down 30%. The latest news is that the CEO overseeing the turnaround at the struggling group is set to leave the company next year.
The company has also announced that it will sell its remaining stake in Penguin Random House. The book publisher sale follows on from the disposals of publications such as Economist Group (owner of The Economist magazine) and The Financial Times. The Penguin deal means Pearson is offloading its final 25% stake for £530m.
Investor’s concerns
There is still scepticism over the current strategy of focusing on becoming a digital education company. The shift has, in the view of many analysts, taken too long and has resulted in a series of profit warnings.
Pearson also seems to be running headfirst against a trend towards using cheaper educational – often free – online learning tools. This is hitting its current textbook business, particularly in North America, but also calls into question the big bet being placed on moving ever more into this space without the diversification that owning newspapers and so forth added to the group.
On top of that, digital margins – in part due to competition – are likely to be lower. This means volumes, the amount it sells, will need to be far higher which is a big ask and means the group will need to keep cutting costs to keep investors happy.
But could brighter times be just around the corner?
What could happen in 2020?
Firstly, from the Penguin deal, £350m will be given to investors through a share buyback ,which should be good for the share price. That’s a nice sweetener, but on its own means little without the turnaround of the group improving.
A new CEO could bring about an acceleration of the current strategy, which if it’s the right one long term, could be good for the group or could mean a rethink on where the group is heading. This will cause uncertainty in the short term that could hit the share price, but may be better in the long run.
Either way, 2020 is very likely to be an interesting year for the company and its shareholders.
Pearson already took the decision a few years ago when it knew the turnaround in its business was going to be tough to slash its dividend, so 2020 should see investors being rewarded with a rising dividend. Especially since the company’s financial situation appears to be stabilising.
Overall, I think Pearson is still a very risky company to invest in. The dividend yield isn’t above the average for the FTSE 100 as it is only around 3%, which isn’t enough reward give the risk that the group’s strategy is the wrong one.
