Pearson 1st Quarter Trading Update

[idpickering]

Operating performance on track

Total underlying revenues are up 1%, with growth in North America and Core partially offset by a decline in our Growth segment due to the phasing of sales in our South African school courseware business.

· US higher education courseware revenues grew slightly as lower gross sales were offset by lower returns from the channel. The underlying market pressures in this business continue to impact gross sales as expected. Our guidance for 2018 therefore remains unchanged: we expect net sales in US higher education courseware to be flat to down mid-single digit percent.

· The cost efficiency programme that we presented in August 2017 is on track to deliver £300m1 of annualised cost savings by 2020, with cumulative savings by the end of 2018 of £95m.

· Net debt at the end of the first quarter was down significantly year on year at £0.6bn (2017: £1.1bn). Net debt was higher than December 31st 2017 following the typical seasonal pattern of cash outflow and the completion of our share buyback, partially offset by proceeds received from the disposal of Wall Street English. We continue to expect year end net debt to be in line with 2017.

· We maintain our guidance range for 2018 with operating profit of £520m to £560m, adjusted earnings per share of 49p to 53p and cash conversion in excess of 90%. This is based on our portfolio at 31st December 2017, a net interest charge of £45m, a tax rate of approximately 20%, and exchange rates on 31 December 2017.

· Q1 is our smallest quarter. Pearson's sales and operating profit are always weighted towards the second half of the calendar year.

· Our US K-12 courseware business remains classified as held-for-sale with negotiations on the disposal progressing.


John Fallon, Chief Executive said:

"We have made a good start to 2018, performing in line with our expectations. We continue to make good progress against our strategic priorities including our digital transformation and we expect to grow underlying profit in 2018."

[Arborbridge]

Pearson is a slight problem for me with its low yield. Referring to my post in the thread about BT, I could sell PSON to release some investable funds to other shares: a yield of 6% or so versus one of 2%-ish from Pearson would make sense. OTOH, the Pearson share price is in a nice trend and I would like to ride that as long as possible.

Perhaps time to hedge my bets on this one and put a generous stop loss on Pearson and let the market dictate. That way, I can ride the trend, but limit any downside. The lower yield could be amply offset by the capital gain, should it continue.

Dunno - always a difficult decision.
Arb.

[kempiejon]

Dunno - always a difficult decision.
Arb.

Arb,

As a guideline, I choose not to sell, I hold Pearson but don't have your quandary. If there is a trend of price rises I'll be happy enough but I'd much rather see dividend increases. Swapping a low yield for higher one does look attractive but there's always them frying pans to be scared of and I'm timid.

[idpickering]

Pearson is a slight problem for me with its low yield. Referring to my post in the thread about BT, I could sell PSON to release some investable funds to other shares: a yield of 6% or so versus one of 2%-ish from Pearson would make sense. OTOH, the Pearson share price is in a nice trend and I would like to ride that as long as possible.

Perhaps time to hedge my bets on this one and put a generous stop loss on Pearson and let the market dictate. That way, I can ride the trend, but limit any downside. The lower yield could be amply offset by the capital gain, should it continue.

Dunno - always a difficult decision.
Arb.

I don't hold Pearson any more, but if I was in your shoes Arb, I'd get the invested money earning me a better income ASAP. This is HYP after all. Good luck with whatever you decide.

Ian.

[Arborbridge]

Thanks guys. I'll probably sit on it for a while, picker around, then possibly make some horrendous impulse decision. Well, actually, not so much impulse as the following: my brain spends ages (perhaps weeks or months) processing scenarios, and then suddenly a trigger makes me act. So it can happen quite quickly when it does.


Arb.

[Arborbridge]

I don't hold Pearson any more, but if I was in your shoes Arb, I'd get the invested money earning me a better income ASAP. This is HYP after all. Good luck with whatever you decide.

Ian.

Of course, HYPwise, that's the standard action, but since Pearson has increased its SP by around 30% in three months, it shos what can happen if you are lucky - hanging on for a while was the right thing. Nothing clever there - I just noticed Nick Train didn't sell out!

Whether hanging on for longer will help is in the lap of the Gods. I remember other cases in which I've happily taken a 20% profit, only to find the share price sky rockets! C'est la vie.

Thinking about "impulse" I've just bought tickets for the Royal Ballet on Monday, having seen the live broadcast last night. Can't wait to see it again, in the flesh this time.

[moorfield]

Perhaps time to hedge my bets on this one and put a generous stop loss on Pearson and let the market dictate. That way, I can ride the trend, but limit any downside. The lower yield could be amply offset by the capital gain, should it continue.

Think of your stop loss in terms of yield, not price. 2% is at/under half of the FTSE100. If you want to ride the trend you're in the wrong place - try a spread bet on the price instead, even using very conservative gearing (say 2x) should be enough to test your conviction there ...

6.6% (IMB) is currently the highest yield I would switch into in my own HYP (the next highest yields being SSE, CNA which are excluded until the SSE corporate action completes) - that triples the income your PSON capital generates currently.

[idpickering]

I don't hold Pearson any more, but if I was in your shoes Arb, I'd get the invested money earning me a better income ASAP. This is HYP after all. Good luck with whatever you decide.

Ian.

Of course, HYPwise, that's the standard action, but since Pearson has increased its SP by around 30% in three months, it shos what can happen if you are lucky - hanging on for a while was the right thing. Nothing clever there - I just noticed Nick Train didn't sell out!

Whether hanging on for longer will help is in the lap of the Gods. I remember other cases in which I've happily taken a 20% profit, only to find the share price sky rockets! C'est la vie.

Thinking about "impulse" I've just bought tickets for the Royal Ballet on Monday, having seen the live broadcast last night. Can't wait to see it again, in the flesh this time.

Fair enough Arb. What’s the yield on codpieces currently?

Ian

[Arborbridge]

Think of your stop loss in terms of yield, not price. 2% is at/under half of the FTSE100. If you want to ride the trend you're in the wrong place - try a spread bet on the price instead, even using very conservative gearing (say 2x) should be enough to test your conviction there ...

Sorry, I don't get that. If I had followed that argument and sold on yield months ago to switch into a x2 yield, I would have missed a significant gain in capital - equivalent to far more than 6% pa. The only question from now on is whether to cash in the gain as it is, or protect it to some degree that I find acceptable. Either way, I've made a gain bigger than any yield differential might have given me.

Using your argument, I would have sold Tesco and possibly MRW, both of which have been my biggest gainers in the past year.
It's all cash: as we sometimes say, it is fungible.

Arb.

[moorfield]

Either way, I've made a gain bigger than any yield differential might have given me.

If you crystallize it .... It's a similar question to the ULVR/IT one we've discussed previously. Regardless of historical gain or loss, what's the point of holding £X now producing 2% p/a ?

As you said it's always difficult decision. That's why I also measure overall portfolio income against a pre-determined target each year - I could recycle my low yielders, but don't need to currently.

[bluedonkey]

Playing devil's advocate here.

Why sell now when momentum could produce a further 30% price rise, and then switch to IMB, etc, thus getting more income than switching now?

(in my case, I just let neglect take over and hope it's benign)

[Gengulphus]

I don't hold Pearson any more, but if I was in your shoes Arb, I'd get the invested money earning me a better income ASAP. This is HYP after all. Good luck with whatever you decide.

Of course, HYPwise, that's the standard action, ...

I'm pretty certain that the standard action (if there is such a thing at all) for a HYP is to purchase something if you've got spare cash available, deal with a takeover or other corporate action if it forces you to, and 'masterly inaction' otherwise - so in this case, 'masterly inaction'. I.e. your statement might well be true if you replaced the word "the" with "my" or "Ian's", but as it stands I'd say it's either false or simply meaningless because there is no such thing as "the standard action" for a HYP...

Which should not be taken as a recommendation by me for 'masterly inaction'. It's what I've chosen so far for my own holding, but that's merely because I'm very uncertain about the best course of action (or inaction!) for my own holding, and so am most definitely not going to try recommending any particular course of action to anyone else!

So selling and using the proceeds to buy something with a better yield certainly strikes me as a reasonable judgement call by a HYPer, but as one they should only choose on the basis of their own considered judgement, not because of a belief that it is "the standard action" HYPwise.

Gengulphus

[Gengulphus]

Playing devil's advocate here.

Why sell now when momentum could produce a further 30% price rise, and then switch to IMB, etc, thus getting more income than switching now?

The answer to the devil employing you is short and sweet: yes, it could.

;-)

Gengulphus

[richfool]

The IC today reports that Alex Wright of Fidelity Special Situations is bullish about Pearson. He points out it is a reverse cyclical company.

He comments that there are a lot of digital-only businesses within Pearson that tend to be glossed over by the market, and its higher educational business is projected to be 80% digital based by 2020. He feels that "Pearson will increasingly be seen as a tech company rather than a book company, and that the change in multiple that could follow could be very dramatic."

That may of course be of less interest to HYP'ers who will be most concerned with the dividend yield, but it's a factor I would keep in mind, if I held it.

Source the Investor's Chronicle 4th - 10th May.

[monabri]

Here's an assessment from Simply Wall Street

https://simplywall.st/stocks/gb/media/l ... son-shares

On the basis of this assessment, I would suggest to sell .

- overvalued compared to future cashflow (714p versus 893p closing price)
- negative 7% expected earnings growth over the next 1 to 3 years
- dividend yield of less than 2.5% out to 2021.

[Arborbridge]

I don't hold Pearson any more, but if I was in your shoes Arb, I'd get the invested money earning me a better income ASAP. This is HYP after all. Good luck with whatever you decide.

Of course, HYPwise, that's the standard action, ...

I'm pretty certain that the standard action (if there is such a thing at all) for a HYP is to purchase something if you've got spare cash available, deal with a takeover or other corporate action if it forces you to, and 'masterly inaction' otherwise - so in this case, 'masterly inaction'. I.e. your statement might well be true if you replaced the word "the" with "my" or "Ian's", but as it stands I'd say it's either false or simply meaningless because there is no such thing as "the standard action" for a HYP...

Which should not be taken as a recommendation by me for 'masterly inaction'. It's what I've chosen so far for my own holding, but that's merely because I'm very uncertain about the best course of action (or inaction!) for my own holding, and so am most definitely not going to try recommending any particular course of action to anyone else!

So selling and using the proceeds to buy something with a better yield certainly strikes me as a reasonable judgement call by a HYPer, but as one they should only choose on the basis of their own considered judgement, not because of a belief that it is "the standard action" HYPwise.

Gengulphus

Yes, Gengulphus - I must have had a mental flip when I wrote that, for the standard Pyadic HYP reaction would be masterly inaction, not to sell on the yield basis discussed.
For some reason, at that moment, TJH's modified HYP method (of selling when the yield decreases below a certain floor) had become the default in my mind - probably because I've adopted his method too.

Apologies for that.

[Arborbridge]

Actually, Pearson is becoming a really interesting share for discussion, as regards "to sell or not to sell" and whether it is a good thing or not in general.
It has been on my "probable sell" list for a long while, and when I do, it will go into the list of voluntary sells to test my decision making. Unfortunately, the fact that I am making this study has disturbed the whole idea: from the moment one sets up a study, it influences one's future behaviour! At least the history examples were done without this conscious knowledge.


Arb.

[Arborbridge]

Pearson share price is almost begging me to take some action. I see the forward yield is now down to my 2% limit, but with 2.5% pencilled in for next year: i.e. dividend increasing which is, after all, what we are looking for. It is now the lowest forward yielder I have - even lower than Tesco, and the latter's dividend is likely to increase faster next year.

As a result, I will today set a stop loss at a price which I have yet to determine. It will be pretty tight, though, so is likely to trigger if the price does not continue increasing.

Decision made.

Also: topping up NG tomorrow.


Arb.

[micrographia]

I'm not one usually one to sell a share after a divi cut, but PSON was an interesting one for me. I was in the fortunate position of still being in profit on my PSON shares, having bought most of them a fair few years ago, so selling and using the cash to invest in higher yielders was an option - this would go some way to filling the CLLN-sized hole in my income stream. On the other hand, selling would mean I lost a sector in my HYP and it seemed to me that providing educational materials could be a pretty good long-term business to be in if management got their transformation plans right. In the end I compromised; on the grounds that it wasn't the company I originally bought, I sold 2/3 of my holding at the end of last year and put the cash into TW. and a top-up of LGEN. I appeased my masterly inaction tendencies by holding onto the remaining 1/3 to see what might happen. Happy enough with both decisions at the moment.

EEM

[ZipserSir]

Think I will sell a part of my holding on Monday. The dividend outlook is relatively unpromising and I hope there will be better possibilities elsewhere. Still have a sizable holding in a different account and it would be nice to see the current price bull run continue to the point where I can get my original investment back.