Pearson resets dividend due to uncertainty over North America
Pearson expects to report full year operating profit and earnings per share in line with forecasts, but warned there will be a fall in revenue due to a decline in the North American higher education market as it aims to accelerate its digital transition in order to manage a fall in print.
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In response to the challenging and uncertain North American higher education courseware market, Pearson no longer expects to reach its operating profit goal for 2018 and has accelerated its digital transition, to manage the decline in print, and to reshape its portfolio.
Adjusted operating profit and adjusted earnings per share for the calendar year are expected to be about £630m and 57p, respectively, with revenues down about 8% primarily due to the weakness in North American higher education courseware.
The FTSE 250 company began 2017 with a base level of underlying profitability that is around £180m lower than it had expected in early 2016, as it expects operating profit this year to be between £570m to £630m, with adjusted earnings per share between 48.5p to 55.5p.
It has also recommended a final dividend of 34p for the total 2016 dividend of 52p, but as a result of the continued challenges Pearson intends to rebase its dividend from 2017 onwards.
Pearson accrued around £55m in costs, which was less than originally planned for the 2016 staff incentive programme.
The North American higher education courseware market was weaker than the company expected, as net revenues fell 30% during the final quarter of 2016 resulting in an 18% decline for the year. The company believes that 2% of this decline was driven by lower enrolment, particularly in Community College and amongst older students, about 3-4% of the decline was due to an impact from rental in the secondary market, and about 12% was due to an inventory correction in the channel.
Elsewhere, the company’s online program management business, virtual schools and professional certification all continued to grow, and North American student assessment profits rose slightly despite declines in revenue.
In the UK, the qualifications business saw a stabilisation in exam registrations and growth markets have returned to profitability.
During 2017, the company aims to sell its 47% stake in publishing firm Penguin Random House to its joint venture partner, Bertelsmann, in order to use the proceeds to strengthen its balance sheet and return excess capital to shareholders.
It also plans to invest £50m in the courseware service and increasing participation in the courseware rental market by reducing eBook rental prices by up to 50% across 2,000 titles and by launching a print rental program.
Analysts at Liberum said that the company’s North American higher education business, which is about 45% of total profits, has always been an area of concern as students were no longer paying for expensive textbooks and moving to cheaper options, particularly book rentals.
“We think this acceptance is too little, too late. Reducing e-book rental prices by 50% might not be enough to take share and, in any event, like with music labels, there is a question of association for students between the publishers’ title and the book they want to buy. The new rental plan may also put Pearson at odds with booksellers, their main customers. While a monetisation of Penguin Random House should sort balance sheet issues, it also means significant earnings dilution. This is likely to place this stock, in many investors' minds, in the category of this is the ‘new newspapers’ with all that implies.”
While, George Salmon, equity analyst at Hargreaves Lansdown, said that selling its final media asset would be testing investors’ faith.
He said: “With the group fearing that textbooks and other educational equipment would enter terminal decline, Pearson took the bold step of changing tack. The group pinned its hopes on online and virtual courseware, and in 2015 sold off assets such as the Financial Times and The Economist newspapers to generate the cash to hold the dividend steady through the transition.
“Those sales don’t look too smart now. By pressing on and selling its final media asset, publishers Penguin Random House, chief executive John Fallon is seriously testing investors’ faith that it’ll be alright in the end.”
Shares in Pearson fell 21.72% to 632.50 at 0825 GMT.