The Pearson (LSE: PSON) share price has looked a bit weak in 2023. But since the summer, it’s been picking up. And the longer term looks better.
Pearson shares were in trouble before the pandemic arrived. The publishing business found it hard to adapt to the fast-moving technology world.
But the turnaround looks good so far, with the shares on the way back since mid-2020.
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AI learning
Pearson posted a nine-month update on 30 October, and there’s one thing I want to pick up on.
Outgoing CEO Andy Bird said: “We’ve received positive initial feedback from our Generative AI tools and are evolving our AI capabilities.“
As an investor, I’m cautious whenever I hear talk of artificial intelligence (AI). Not that I think there’s anything wrong with it, no. It’s an approach with great potential.
It’s just that adaptive, learning-based, technology (or AI) has been around for years. It’s evolving nicely, but it isn’t the brand new thing the buzzword headlines seem to suggest.
So I try to push the 2023 AI hype to the back of my mind.
Show me the cash
What Pearson needs is to get back to sustainable earnings growth. And I think the signs look good.
At the Q3 stage, the board has upgraded its full-year operating profit guidance by £20m. It now expects to report between £570m and £575m.
Analysts see earnings getting back to growth too.
On today’s share price, they put the 2023 price-to-earnings (P/E) ratio at 20, which might not look cheap. But forecast earnings rises could drop that to 14 by 2025.
Dividends and buyback
At the same time, the tipsters reckon cash flow and dividends will rise too. We’re only looking at yields of around 2.5%, but they’d be covered at least two times by earnings, and rising.
With a healthy cash position, Pearson is on a share buyback right now. It plans to plough £300m into repurchasing its own shares, and had reached £115m by 27 October.
But if there’s cash around, why not lift the dividend yield a bit too and pay more than that couple of percent?
That’s a question companies often have to face, and it depends in a number of things. One is the current share price valuation.
Good value?
If a firm reckons its shares are too cheap, it can often build better long-term returns via a buyback. The idea is that future earnings and dividends per share will rise, as it’s all spread across fewer shares.
Looking at Pearson in isolation, I think I see a good company at an attractive price now. If forecasts come good, hindsight could show this as a time to buy.
But I’ll hold off for a couple of reasons. The main one is that I see stocks out there that I rate as better value than Pearson.
Mixed revenues
And the future of Pearson’s sales mix is still uncertain. While some revenue sources are up strongly, like English Language Learning, others have declined.
It’s definitely one I’ll watch, though, with a view to buying on any dips.
