Is Pearson The Ultimate Retirement Share?

Published in Company Comment on 8 November 2012

Will shares in Pearson (LSE: PSON) help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Pearson (LSE: PSON) (NYSE: PSO.US), the educational publishing company that also owns the Financial Times and Penguin.

Financial education

Pearson has proved a good investment for its shareholders, outperforming the FTSE 100 over the last 10 years:

Total Returns2007200820092010201110-yr trailing avg
FTSE 1007.4%-28.3%27.3%12.6%-2.2%7.5%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Pearson's 10-year average trailing total return shows that it has stayed ahead of the FTSE 100 and suggests that it could be a good retirement share.

What's the score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Pearson shapes up:

Year founded1844
Market cap£10.4bn
Net debt£682m
Dividend Yield3.4%
5-year average financials
Operating margin12.7%
Interest cover8.0x
EPS growth7.9%
Dividend growth7.6%
Dividend cover1.6x

Source: Morningstar, Digital Look, Pearson

Here's how I've scored Pearson on each of these criteria:

LongevityAn old timer, even thought its move into media wasn't until 1921.4/5
Performance vs. FTSEOver a decade, it's nosed ahead of the index.4/5
Financial strengthLarge, stable profit margins and low gearing.4/5
EPS growthSteady growth.3/5
Dividend growthDividends have kept pace nicely with earnings per share.5/5
Total: 20/25

A report on Bloomberg this week suggests that Pearson might sell the Financial Times, although the company has not made any official comment.

Whatever the case, Pearson's investment appeal is likely to remain, as the group's main source of profit is its educational publishing business, which accounts for about 75% of revenue and profit. Of the remainder of the company's divisions, the FT Group and book publisher Penguin each contribute about 12% of profits, although Penguin's revenues are double those of the FT Group, highlighting the latter's profitability.

Pearson is focused on improving the profitability and growth of Penguin, and last week announced the division would combine with Random House to create the "world's largest consumer publishing organisation". Random House is owned by German media giant Bertelsmann and the companies believe the joint venture will help them expand their share of the digital publishing market and gain better access to faster-growing emerging markets.

As a retirement share, Pearson has several attractions.

Its longevity and steady growth is reassuring and its dividend growth history is excellent; the dividend has grown every year since 2003 (the earliest figures I could find) and this year's forecast dividend of 44.5p per share is almost double 2003's total dividend of 23.7p per share.

Shares that provide this kind of reliable income growth are few and far between, but are ideal if you need a retirement income from shares, as they will help your pension stay ahead of inflation.

Top income picks

Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors.

One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.

The good news is that you can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

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Further investment opportunities:

> Roland does not own shares in any of the companies mentioned in this article.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

IDPickering 08 Nov 2012 , 2:20pm

Thanks for your analysis of Pearson, Roland.

I hold them in both of my HYPs, and Pearson performed admirably. A truely buy and forget share.

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