We recently compiled a list of the U.K. Dividend Aristocrats List: 2024 Rankings by Yield. In this article, we are going to take a look at where Pearson plc (NYSE:PSO) stands against the other U.K. dividend aristocrats.
In recent years, investors have turned away from UK equities, opting instead for global stocks, particularly high-growth options like US technology companies. The UK stock market is contracting at its fastest rate in over a decade, driven by takeovers of London-listed companies. According to Bloomberg data, approximately 45 companies have been delisted from the London market this year due to mergers and acquisitions, representing a 10% increase compared to the total for last year. This marks the highest number of delistings since 2010. Meanwhile, the value of deals targeting UK companies has surged by 81% this year, exceeding $160 billion.
Earlier this year, UK equities seemed to be experiencing a shift in sentiment among both large institutions and smaller investors. The British stock market continues to attract bargain hunters, as UK equities are now trading at a record discount of over 40% compared to global counterparts, based on Bloomberg data. Many of the takeover targets have been mid-cap companies listed on London’s AIM market, which typically feature low trading volumes and limited analyst attention.
That said, in November, investors returned to UK equity funds after three and a half years of consistent monthly withdrawals and a significant sell-off ahead of the Budget. Data from Calastone shows that retail investors directed a net £317 million into funds focused on UK stocks during the month. This inflow marks a notable shift, ending 41 consecutive months of net outflows, during which over £25 billion was withdrawn since May 2021.
Also read: 10 Undervalued Dividend Aristocrats To Buy According to Hedge Funds
The change in investor sentiment follows a challenging October for equity funds, which experienced record outflows as UK investors withdrew their money due to fears that the chancellor would raise capital gains tax (CGT). At the end of October, during the Budget announcement, Chancellor Rachel Reeves confirmed an immediate CGT increase. The lower rate rose from 10% to 18%, while the higher rate climbed from 20% to 24%.
Analysts suggest the UK stock market could be nearing a recovery, but the timing and pace of this turnaround remain uncertain. This is where dividend stocks play a key role. Prioritizing stocks with rising dividends can offer stability and consistency through different market cycles. In addition, they provide an opportunity for long-term growth, compounding returns over time until share prices rebound. The UK market offers one of the highest dividend yields among major markets. The FTSE 100 boasts a yield of 3.68%, while the FTSE 250, representing medium-sized UK companies, offers slightly lower yields but still provides attractive income opportunities. This allows investors to focus on higher-growth areas, such as smaller companies, while benefiting from increasing dividends. According to a report by BlackRock, currently, UK market dividends are growing at a rate of 2-3%, roughly in line with long-term inflation. Stocks with growing dividends typically have reliable cash flows, enabling them to increase payouts over time.
Janus Henderson’s 2023 annual dividend report confirmed the rise in dividend growth, noting that the UK distributed approximately $86 billion in dividends in 2023, a notable increase from the $63.1 billion paid out in 2020. Given this, we will take a look at some of the best FTSE dividend stocks according to yield.
Our Methodology:
For this list, we scanned over 40 holdings of the UK Dividend Aristocrats ETF, which tracks the performance of the highest-yielding UK companies with at least 7 consecutive years of dividend growth. From this list, we chose 10 stocks with the highest dividend yields as of December 28 and arranged them in order from lowest to highest yield. We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 900 as of Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
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Pearson plc (NYSE:PSO)
Dividend Yield as of December 28: 2.01%
Pearson plc (NYSE:PSO) is a London-based multinational education company that focuses on a wide range of educational publishing and services. The stock has surged by over 132% since March 2020 as the publisher successfully adjusted to the changing online education landscape. The company took advantage of the pandemic, earning substantial profits from its virtual schooling services. It saw a 43% increase in enrollments in its virtual schools during the 2020-2021 academic year. However, in fiscal 2023, the company experienced a 20% drop in Virtual Learning sales due to reduced enrollments.
Pearson plc (NYSE:PSO) is generating strong earnings this year, delivering over 33% returns to shareholders since the start of 2024. In the first half of the year, the company reported revenue of £1.7 billion ($1.25 billion), down from £1.9 billion ($2.39 billion) in the same period last year. After 2025, the company is set to achieve a mid-single-digit compound annual growth rate (CAGR) in underlying sales, along with continued margin improvements. This will result in an average annual increase of 40 basis points, driven by strong performance in its core business, realizing synergies, and expanding into related markets.
Pearson plc (NYSE:PSO)’s cash position came in strong in the first half of 2024. The company generated an operating cash flow of £185 million, up from £106 million in the prior year period. Its free cash flow showed an increase of £77 million at £27 million. This strong cash position has allowed the company to maintain its dividend payments for 33 years in a row. Currently, it offers an interim dividend of £0.074 per share and has a dividend yield of 2.01%, as of December 28.
At the end of Q3 2023, 10 hedge funds tracked by Insider Monkey held stakes in Pearson plc (NYSE:PSO), compared with 11 in the previous quarter. These stakes have a collective value of nearly $33 million. Among these hedge funds, Arrowstreet Capital was the company’s leading stakeholder in Q3.
Overall PSO ranks 10th on our list of the U.K. dividend aristocrats. While we acknowledge the potential of PSO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PSO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.