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Our latest research 13/3/2014

Investment Tools Ltd.
Our latest research 13/3/2014

DividendMax write up 12/3/2014 – Pearson Group PLC

With all of the talk of coming out of recession and GDP reaching pre-crisis highs, we thought it would be good to consider those sectors where companies in fear of a depression (because, were it not for the incredible amount of stimulus provided, that was what we were headed for) could make relatively easy, rapid, big money savings without affecting BAU (business as usual). Our reasoning is simple; if things are picking up, we can expect to see a reversal in those sectors. The FTSE 100 as I write has retreated over 200 points from the strong barrier that is 6850 and as we approach the end of Q1, the FTSE 100 index is down on the year.

Thinking about it we have concluded that the easiest cuts to make are to IT (projects) and the media (Advertising, Education and Training). A strong revival in these areas should lead to a recovery amongst certain companies. We think pure IT, recruitment firms and focussed training and education stocks meet the criteria. This analysis will try and develop that argument.

We will look at the Optimizer. Firstly select the sectors under the ‘show details’ link. Our first sector will be the media sector with a CADI (consecutive annual dividend increases) of 5+. The initial criterion is for a CADI of greater than 5 years. The list from media is Pearson, UBM, Informa, Bloomsbury, 4 imprint and ITE group.  Next up, we look at the software and computer services sector which gives us Micro Focus, Computacenter and Sage group. Finally, we look at the massive support services sector which throws up more than we can list so we pick out those that seem to fit into our criteria such as Hays and Michael Page International.

As we are looking to get direct exposure to a pick up in IT or education and training, we are going to select an initial list which includes Pearson, Bloomsbury, Microfocus, Computacenter, Sage, Hays and Michael Page International.

Looking at the fundamentals we have:

Company

Forward P/E Ratio

Dividend Cover

Annualised yield

Pearson

15.5x

1.5

7.89%

Bloomsbury

13.8x

2.3

4.14%

Computacenter

14.6x

2.5

3.84%

Micro Focus International

13.3x

2.2

4.66%

Sage

17.9x

2.0

3.32%

Hays

24.2x

2.2

2.03%

Michael Page

26.0x

1.5

3.27%

It seems that the market is way ahead of us in terms of the valuation of the recruitment sector and looking at the fundamentals of Hays and Michael Page, they are not attractive and we shall drop them at this stage. We like both Bloomsbury and Pearson, but for the annualised yield of almost 8% we are giving Pearson the nod. The fundamentals of Micro Focus look more attractive than Computacenter and Sage, but we will nevertheless have a look at what the brokers are saying for all three of them.

Company

Buy

Hold

Sell

Pearson

7

8

7

Micro Focus

5

6

1

Computacenter

2

3

0

Sage

3

10

8

We like Sage and it did pay a special dividend last year, but the yield is significantly lower than the others and the brokers seem to be well against it with only three buys out of 21. It has recently gone ex-dividend for its final and considering these factors, we will eliminate Sage.

This leaves Pearson, Micro Focus and Computacenter.

Let’s have a look at the dividends paid by each company over the past 8 years:

Pearson

Year

Dividend in Pence

% Growth

2006

29.3

 

2007

31.6

7.8%

2008

33.8

7.0%

2009

35.5

5.0%

2010

38.7

9.0%

2011

42.0

8.5%

2012

45.0

7.1%

2013

48.0

6.7%

Pearson has declared a final dividend for 2013 of 32p going ex on 2nd April 2014

Micro Focus International

Year

Dividend in Pence

% Growth

2006

3.3

 

2007

5.03

52.4%

2008

6.48

28.8%

2009

9.73

50.2%

2010

14.34

47.4%

2011

14.58

1.7%

2012

20.16

38.3%

2013

25.3

25.5%

 

Computacenter

Year

Dividend in Pence

% Growth

2006

7.5p

 

2007

8.0p

6.7%

2008

8.2p

2.5%

2009

11.0p

34.1%

2010

13.2p

20.0%

2011

15.0p

13.6%

2012

15.5p

3.3%

2013

17.5p

12.9%

Computacenter has declared a final dividend for 2013 of 12.3p going ex on 21st May 2014

Three very good track records and in the case of Micro Focus a remarkable track record. Both Micro Focus and Computacenter, in spite of excellent dividend histories, also pay special dividends / return value to shareholders quite regularly. Computacenter returned 48.7p in July 2013 and 39p in 2006. Micro Focus returned 60p in November 2013. Both remain highly cash generative businesses and further solid dividend increases are to be expected. Of the two, we prefer Micro Focus for its superior dividend history, Lower P/E ratio and its superior annualised yield. (This, in spite of the fact that Computacenter have a final dividend coming shortly)

Pearson has had a tough time of late in share price terms and it is currently trading close to its 52 week low. It has by far the highest yield on offer. It recently released its final results and the market was disappointed. They are expecting earnings per share to come in at between 62p and 67p in 2014 and then for the business to perform strongly from 2015 and beyond. Looking at last year’s figures they were pretty bad with every metric bar sales and dividends showing strong declines. Net debt was the other riser, by 50%! However, much of this is due to cyclical declines in the educational business which they believe will reverse during 2015 with new curriculums in the US and the UK. Additionally, the numbers have been hit by £135 million of restructuring charges. The numbers will have also been affected by the strength of sterling.

We like Micro Focus a lot and we think that further significant dividend increases will take place, but after the big return to shareholders, net debt has increased and it will be some time before we see another special dividend. This makes the difference between the Pearson yield and the Micro Focus yield significant in our view. In spite of the fact that Pearson is promising ‘jam tomorrow’, we feel that it is an important long term holding for most portfolios. The bad news is hopefully out of the way and the expected earnings figures for 2014 have been announced. The yield should provide support for the shares in the short term and if management is correct 2015 and beyond promises to be ‘exciting’ as they focus on ‘the fastest growing markets and stronger financial returns’. We think this is a good opportunity to pick up shares in a quality company at a price last seen in January 2011.

For Pearson, we are estimating the next three dividends to be 32.0p, 17.0p and 34.0p. They are at 1005p at Thursdays close. At 1005p, this will generate a return of 7.89% annualised over a 13 month period.

Pearson yield calculation:

32.0 + 17.0 + 34.0 = 83.0p between now and 1/4/2015 (approximate ex-dividend date of the third dividend)

Ergo 83.0p / 1005 = 8.26% 8.26% annualised = (8.26x365) / 382* = 7.89%

*Number of days until theoretical ex-dividend of the third dividend.

Note that if the dividend forecasts are correct, the actual yield (which DividendMax calls the ‘Optimized yield) is affected by two factors; the share price and the proximity to ex-dividend dates. DividendMax performs these calculations daily against hundreds of stocks in the U.K. and overseas producing new lists every day as prices change, dividends change and ex-dividend dates approach. 

Companies mentioned

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