With educational publisher Pearson, it’s a textbook case of ‘if in doubt, do nothing’

With uncertainty surrounding the learning company, Russ Mould hopes its interim results will add clarity

THE market does not seem to know what to make of educational publishing specialist Pearson’s move to sell part of its stake in Penguin Random House for $1bn (£767bn). Applying the old maxim of “if in doubt, do nothing” means that we will keep avoiding the shares, with the interim results scheduled for Aug 4 offering the next chance to reassess.

After the deal announcement, the shares initially rallied and then sagged amid concerns that the FTSE 100 company was shoring up its balance sheet at a cost of selling off another valuable asset – this time a 22pc stake in Penguin Random House, even if Pearson raised $1bn and kept a 25pc slice of the group.

Confusion also reigns over Pearson’s dividend policy, an area where August’s interims may provide greater clarity. John Fallon, the chief executive, flagged a dividend cut alongside January’s profit warning, and analysts had pencilled in a halving of the annual payment to around 26p a share. That forecast has since slipped to 24p and, on a conference call to outline the Penguin Random House deal, Mr Fallon hinted the dividend could go as low as 18p a share.

A prospective yield of 4.1pc (using a 26p dividend) was providing some support to the stock, whereas an 18p payout equates to 2.8pc, a much less appetising prospect when the company’s growth outlook remains open to question.

Pearson still needs to prove its string of profit warnings are down to short-term factors, rather than more structural problems. One such potential issue is the rise of Open Education Resources, whereby universities make best-of-breed lecturing and educational materials freely available for students to use. This means they can cut down on the expense of buying or renting the sort of textbooks provided by Pearson.

Questor says: Avoid Ticker: PSON

Share price at close: 631.5p

Update: Carillion

OUR warning on June 13 that the share price slide at Carillion, to just below 200p, was a possible warning of trouble ahead has proved mercifully prescient. Last week’s profit warning, cancellation of the dividend and resignation of the chief executive confirmed our worst fears. Some

investors may be tempted to take a contrarian punt and start buying but at this stage that is all it would be – a punt, not an investment.

Debt is reportedly above £800m and the pension liability exceeds £660m. The combined service cost comes to more than £100m a year, when operating profit last year (when things were allegedly going well) was just £146m.

Any acquirer would inherit the pension liability (as well as the debt) and the pension trustees would be at the head of the queue for any rights issue cash, so there is no easy solution. While management battles to sort out the mess, the firm could start to miss out on new contracts, or even lose existing ones, so until there is further clarity on Carillion’s funding position there are far safer ways of looking for a return on your money, although at least yesterday’s HS2 contract award offers a little reassurance.

Questor says: Avoid Ticker: CLLN

Share price at close: 66.9p

Update: Micro Focus

JUST as they were starting to build up a good head of steam, shares in Micro Focus have pulled right back, leaving them marginally below where we first looked at them last October.

Last week’s full-year results drew criticism for the 1pc drop in sales shown by the legacy software specialist, as well as management forecasts for a flattish top line in the financial year just begun. Analysts also remain concerned by spotty results from the $8.8bn cash-and-stock acquisition of Hewlett Packard Enterprise, which becomes part of the group on Sept 1.

However, management has an excellent record in digesting deals and making them work, with the result that Micro Focus has churned out cash and increased its annual dividend payments for a decade. A repeat performance with Hewlett Packard Enterprise could mean the shares are still good value at 16 times forward earnings with a yield of just over 3pc.

Questor says: Hold

Ticker: MCRO

Share price at close: £21.58