The latest crisis at Pearson (LON:PSON) has seen almost £2bn wiped from the value of the company, with income investors dismayed at plans to cut the dividend.
As yet we don’t know how much will be lopped off the payout. However, broker Panmure Gordon is assuming it will fall to around 25p a share to give dividend cover of two-times net profits.
Last year, Pearson doled out 52p a share, while the prospective yield ahead of Wednesday’s earnings alert was 6.5%.
No wonder then that City support for the stock very quickly began to drain away.
“There are few worse investments than an income stock that cuts its dividend, since the share price falls will almost certainly add capital loss injury to dividend yield insult, as shown by Pearson today,” said Charlie Musson of the wealth manager AJ Bell.
Only two FTSE 100 companies - J Sainsbury (LON:SBYR) and easyJet (LON:EZJ) - reduced their dividend payments last year, although there was a spate of around a dozen cuts in 2015.
Along with recalibrating the payout, Pearson lowered its earnings guidance and said it could potentially offload its stake in Penguin Random House.
Employees will also feel the impact of the publishing and education giant’s travails. For the group said it is paying £55mln less in staff incentives than it did in 2015.
This and tight cost control will allow the company to hit City consensus profit forecasts.
Pearson is expected to make operating profit of £630mln, giving earnings per share of 57p for 2016.
The company’s forward guidance suggests it will struggle to match last year’s performance with operating profit seen in the range of £570-£630mln.
Pearson’s problems are rooted in the North American higher education market, where it endured a “further unprecedented decline” in activity in the fourth-quarter.
"We are facing difficult trading conditions in our largest business as we transition to digital,” said chairman Sidney Taurel.
“But as a board, we are confident that the plan announced today will allow the company to navigate these conditions and build on its leading position in higher education."
By 12.45pm, the shares had fallen 30% to 573p. City broker Panmure cut its price target back to 650p a share from 870p and dropped its recommendation to ‘hold’ from ‘buy’.
Liberum, meanwhile, repeated its 'sell' all the way down to 470p.