Pearson's (LON:PSON) Upcoming Dividend Will Be Larger Than Last Year's

Pearson plc's (LON:PSON) dividend will be increasing to UK£0.14 on 6th of May. This makes the dividend yield about the same as the industry average at 2.6%.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Pearson's stock price has increased by 33% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

View our latest analysis for Pearson

Pearson's Payment Has Solid Earnings Coverage

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.

The next year is set to see EPS grow by 55.1%. If the dividend continues along recent trends, we estimate the payout ratio will be 50%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2012, the dividend has gone from UK£0.39 to UK£0.20. This works out to be a decline of approximately 6.2% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.

Pearson Might Find It Hard To Grow Its Dividend

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Pearson has impressed us by growing EPS at 54% per year over the past five years. EPS has been growing well, but Pearson has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.

Pearson's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Pearson has 4 warning signs (and 1 which is significant) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.