Pearson plc (LON:PSON) shares fell as Berenberg said it expects a hit to earnings and a dividend cut on the back of the company’s decision to sell a stake in Penguin Random House.
The struggling publishing group last week announced that it would sell a 22% interest in Penguin to Bertelsmann, lifting the German company’s holding to 75%. Pearson will retain a 25% stake.
READ: Pearson raises US$1bn by selling 22% of Penguin Random House
The transaction will generate about US$1bn for Pearson, helping to strengthen its balance sheet and return some £300mln of surplus cash to shareholders through a share buyback programme.
Berenberg cuts Pearson's target price
Berenberg repeated a ‘sell’ rating on Pearson and reduced its target price to 490p from 605p, saying that its implied value of the disposal, at US$3.5bn, was below its expectations of US$3.7bn.
“Unlike Pearson’s prior disposals of the FT and the Economist, there was no upside value surprise, reflecting the fact that there was only one bidder, and one with a constrained balance sheet,” Berenberg said.
Berenberg added: “The cost of the disposal of what is a good cash-generating business, although one that is growing slowly, is a reduction in earnings per share.
“Including the impact of lost earnings on the stake that was sold, a reduced contribution from the residual stake given higher debt at Penguin, higher cash balance and the share buyback, we estimate a full-year dilution of 10% for 2018.”
Dividend cut may be on the cards at Pearson, Berenberg says
Pearson has also indicated its intention to rebase its dividend – a City euphemism for cutting its dividend – to cover slightly more than two times its earnings, excluding any contribution from Penguin. Berenberg said this suggests a dividend of 16p for 2017, and likely the same in 2018, down from 52p last year. That would bring its dividend yield down to 2.5% from 8.3%, the broker estimated.
“If we take the view that Pearson should offer a higher yield than its peers, then a 4% yield may be justified, on which basis, the stock should trade at 400p,” Berenberg added.
“Arguably, though, the benefit of Pearson’s latest cost-savings programme will not be felt until after 2017, so this approach may be too harsh.
“Our discounted cash flow yields a fair value of 580p, but arguably a higher cost of capital should be assumed now that Pearson has sold a steady cash flow generator to invest in a business that faces major strategic headwinds and has failed to deliver on prior expectations.”
Shares in Pearson dropped 1.26% to 627.50p in morning trading.