Pearson (LON:PSON) Is Paying Out A Larger Dividend Than Last Year

Pearson plc (LON:PSON) will increase its dividend on the 20th of September to UK£0.063, which is 5.0% higher than last year. This will take the annual payment from 2.5% to 2.5% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for Pearson

Pearson's Earnings Easily Cover the Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. The last dividend was quite easily covered by Pearson's earnings. This indicates that quite a large proportion of earnings is being invested back into the business.

Looking forward, earnings per share is forecast to fall by 40.6% over the next year. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 71%, which is comfortable for the company to continue in the future.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from UK£0.39 in 2011 to the most recent annual payment of UK£0.20. The dividend has shrunk at around 6.5% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS is growing. Pearson has seen EPS rising for the last five years, at 56% per annum. Pearson is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

We Really Like Pearson's Dividend

Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. The distributions are easily covered by earnings, and there is plenty of cash being generated as well. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. All in all, this checks a lot of the boxes we look for when choosing an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Pearson that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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