Stock Sold – Pearson PLC


On Monday 6th October 2014, I sold all of my 117 shares in Pearson PLC for £1,394.72 which included charges. I bought the shares in March 2014 for £1,185.24. The share price at the time was 997.82p per share. At point of sale, they were worth 1202.28p per share. The sale made me a modest profit of £209.48

Pearson paid me a final and interim dividend for the duration I was a shareholder. I received a total of £57.33

For my £1,185.24 investment, I received a total of £266.81 from Pearson, which is a 22.51% return on capital. 


Why did I sell my shares?

I have spent a HUGE amount of time researching investing strategies and reviewing my current processes over the last couple of weeks. To put this in perspective, the post I wrote in September on my Investment Strategy, is already out of date for me. I’ve spent some time learning more about growth and value investing after writing the post, as the subject interested me. I would like to invest in companies that offer good value and if I see any growth opportunities then I will invest in them too.

There were a few reasons as to why I sold my shares in Pearson. The share price was up approx 20% on what I originally paid for them. This was a threshold I mentioned in my ‘growth strategy’, where some investors suggest selling. There was a reasonable profit to be made.

On the 29th September (prior to my decision), Westhouse Securities changed it’s position on Pearson to ‘Sell’. It acknowledged the long term attractions, but it set a target price of 1,001p per share. I’ve copied the report I read below. I’m not bound by what a singular Broker announces, but it did start to put doubt in my mind. Would one of my best performing stocks lose all of the profit I’ve made from its growth? I was currently just short of 20% up in profit, and if the broker was right, then I would lose almost all of it. 

Publishing group Pearson has its long-term attractions but faces immediate trading and execution risks, with the resulting trade-off more than reflected in its current valuation, Westhouse Securities believes. Hence, the current share price offers a profit-taking opportunity when compared to these analysts’ price target of 1,001p for the stock. 
Indeed, the company is an “interesting” play on long-term structural change in the global education market, thanks to its trusted brands, a broad customer base and robust finances, Westhouse deems.
Pearson should also benefit from population growth, increased public/private sector spending and the expansion of the middle class in emerging markets – including strong demand for English and the transition towards digital product and platforms. Nevertheless, the cultural change being undertaken by the firm “carries further execution risk”. 
Furthermore, print products still account for approximately 40% of revenues. Hence, a significant digital migration remains to be negotiated. That transition, together with the disruption of several of the firm’s core markets, will hold back growth over the broker’s three-year forecast horizon. US dollar exposure could also constitute a potentially disruptive factor.
For all of the above reasons Westhouse Securities has initiated coverage of Pearson at ‘sell’ with a price target of 1,001p. 

On the back of reading the news, Pearson’s share price has reduced by 4.35% in the last 7 days. Is this fall going to continue to the 1000p mark as predicted? Further doubt entered my head. 

I have spotted good value in a few dividend paying stocks via my research. These companies were at least matching the dividend yield, dividend cover, and dividend growth that Pearson’s offered. Most of them were higher. These companies had more projected growth, and their current share price is views as ‘Undervalue’, especially when compared to Pearson.

I could sell my shares in Pearson, which are in a positive position, and ‘replace’ them with an equally strong dividend paying company. My dividends would then not be affected. The share price price for the new company has more perceived growth opportunity, which could allow me to make a capital gain in the mid to long term, which increases my profit further.

My total profits this year would increase with the sale, and I would have more money to invest with for 2014. My goals and end of year figures would be enhanced. This is why I invest, to make more money.

Octobers wage was the lowest of the year, and I didn’t have a lot of spare capital to invest with. I’m expecting another below average wage next month. I should be able to invest in November, but it will be tight. Alternatively, If I sold Pearson, it would boost my income and would make Investing in November more likely. This is a less influential reason, but a reason nonetheless.


I thought you were going to keep shares forever? Are you making the right decision?

I have said several times on this Blog that I’m a buy and hold investor. There isn’t anything fundamentally wrong with that. It’s actually a very safe and conservative investment option, which is highly likely to big profits in the long run (20+ years). 

Buying and selling shares, increases the risk of what I’m doing. I can make more money by doing so, but I could also lose more. The short answer is I’m willing to take that risk. You can attend courses, read books and talk to experts to develop your knowledge on any subject. I would recommend doing all of the said things. I’m a big believer in following through and practicing. I believe far too many people understand the theory behind many topics (investing is just one), but are unwilling to practice. Until you experiment or practice what you’ve learned, you could be holding yourself back from developing your knowledge to a new level. I think you can gain a huge amount from experimenting. I may turnaround in 6 months time and say ‘I’ll never sell dividend paying shares again’ but I want to go through this process myself and learn the pro’s and the con’s to it. No article and advice can replace that for me. I’ve read solid arguments to doing both, how am I (or you) supposed to know which one is right?!  

I’ve learned that there are many people out there who believe Dividend Investing is too conservative and slow, and they have made gains in the stock market at a quicker rate than some of the successful DGI investors. Are they right? Could I make more money that way? 

I’ve currently made more money than I would have if I had stayed with Pearson (as the price as lowered). Only time will tell if it was the right call or not. 

My strategy in short will be about buying low and selling high. Purchasing companies that are perceived to be ‘on sale’, and selling them when they are viewed are ‘over priced’. I will take the mid to long term approach, which might involve me keeping shares for 5-10 months to 5-10 years. I will wait as long as I need to, and I won’t be concerned about selling early (like I have with Pearson). I’m not after a ‘quick buck’, I just want to get value. I plan on buying much more than selling to boost the overall size and spread of my portfolio. I would currently like to own 30-40 companies that pay dividends. (I’m a at least a year away from this)
I will also focus on which sectors I’m invest in. I want to ensure that I’m not investing too heavily in one area – Such as Banks or Mining companies. This will reduce the overall risk of my portfolio. 


Would you suggest staying away from Pearson?

Not at all. It depends on your strategy! 

Pearson have been great to me in a very short period. They have a solid reputation for raising dividends year after year. If their share price lowers to the 1000p mark, I will most certainly be looking to re-invest with them, but they will be compared against other solid dividend paying companies for value. If I do reinvest in them I would have gained £200+ in profit, and still benefit from their dividends and long term growth.  


What have you down with the money from the sale?

I have already bought some shares, which happen to meet a set criteria I had for them. I will ‘reveal all’ in another Post this week. I wasn’t expecting to buy the shares so quickly after the sale, but I stuck to my strategy of buying them once a certain price was met. 


I was a little apprehensive in writing this post. My strategy has changed a lot in the time I’ve been writing this Blog. I think it could be viewed as both positive and negative. I’m open to try new things but I constantly change my mind and don’t see through a particular strategy. I would like this Blog to represent a reliable and trustworthy source of information on investing. I don’t believe I’m there yet. I hope that by experimenting in what I’ve learned I will get there there eventually. 


What are your thoughts? Are my messages confusing? Do you think I change my mind too frequently? Was I right to sell Pearson?

0 Comments

  • weenie

    Reply Reply 8th October 2014

    Hi Huw

    You have 'growth' and 'investment' as part of your strategy, so it all sounds like part of the plan to me, especially as you've already used the proceeds of the sale to purchase more shares to add to your portfolio! Sounds like you've just taken advantage of an opportunity to make a decent profit selling the Pearson shares and I'm sure other opportunities will present themselves in the future, so you will adapt your strategy accordingly. The fundamental part of your strategy, that of buying and holding still remains.

    You're doing tons of your own research so can make informed strategic decisions – keep at it! 🙂

    Early last month, I changed around 70% of my portfolio after reading Tim Hale's 'Smarter Investing' book – I sold/switched over 9 funds (all of them for a small profit), funds which I had planned to hold for at least 3-5 years. I created my 'Portfolio for all seasons' template to aim for – my 'strategy' for the next 5 years, but already I see that I may have to amend it slightly, as the individual shares I am buying will radically alter the mix of my portfolio. However, I'm going to stick at it, give it at least 6 months and review then.

  • Huw Davies

    Reply Reply 8th October 2014

    Hi Weenie,

    I'm pleased you see it that way. I'm not sure how it comes across to the reader. I feel like I know what I want to do, but I don't always feel like I'm able to explain it fully.

    You're absolutely right, I still want to buy and hold, but I'm prepared to sell if an opportunity arises. I hope my research does pay off!

    I've been really impressed with how you've learned and implemented your strategy. I think it's important to have a plan and to stick to it for a set period. You'll be able to see how effective your plan is. I know that DGI works, and I want to branch out and see if value and growth investing have legs too. I wish you all the best on your 'portfolio for all seasons'! I'll keep an eye on your progress too.

    Cheers
    Huw

  • Dividend Life

    Reply Reply 12th October 2014

    Hi Huw,

    It seems to me that you made a reasonable decision and followed it through; so good job. There's no "perfect" strategy for investing; you have to decide what works for you given your objectives and risk tolerance.

    In general, "buy and hold" typically wins over "buy low / sell high" because of the additional commissions / taxes paid when buying and selling, plus the difficulty in knowing when to buy and when to sell. But clearly, if you're 20% up in a position and you see a better use of your money elsewhere, I think there's nothing wrong with switching. It's just like standing in line at a supermarket checkout and seeing the other line move faster – there's always a risk that the second line might stop moving after you join it or that the first line might move faster once you've left it.

    Personally, I avoid the whole growth vs. value debate; I'm interested in companies that I believe can increase dividend payments for the long term through bad economic conditions, and I'm not really interested in capital gain since I don't follow a total return strategy for my dividend income portfolio (meaning that I don't plan to sell 4% of it a year in retirement). I look for sustainable dividend income instead.

    Obviously, companies that can increase dividends annually implies revenue "growth" (and higher capital return) and the higher the dividend yield, the lower the stock's "value" and that's as much of growth vs. value I care about. I would certainly sell a company whose dividend yield is too low and replace it with another.

    Cheers,
    -DL

  • Huw Davies

    Reply Reply 13th October 2014

    Hi DL,

    Thanks for stopping by. I hope all is well with you.

    I feel more confident in this decision than I have in any other recently. The hard part was trying to put my decision in writing in this Blog, for people to understand what I've done and why. It turned out that writing about it confirmed my thoughts on it.

    I have previously written about not selling any stock and keep the dividends rolling in. I don't think there is a lot wrong with this strategy in the long term, but I don't think it's optimal. The FTSE 100 has had a poor year overall, and a large number of stocks have lost value in my portfolio, as I've invested heavily this year. There are some stocks which are now at great value (or on sale), and there are some meaningful profits to be had. These stocks are reputable companies that pay increasing dividends every year. The trade for Pearsons made sense to me, because there was an argument for them being slightly over valued, and there are a lot of shares that are currently not.

    I don't have a lot of other shares that are looking overvalued, so I don't think I'll be selling any based on my current portfolio. BAE Systems is approaching 20% up for me, but I don't plan on selling it as it's a defensive stock, and not currently overvalued in my opinion. For now I plan on buying some of the stocks I see on sale and continue building the income from them.

    Your last paragraph summaries it well. Increased dividends implies revenue growth. If that growth goes to a level that you're receiving a lower dividend yield, it might be worth checking to see if your money might do better else where. This is an optimal approach, but it isn't a guarantee!

    Thanks for sharing your thoughts. All the best!
    Huw

Leave A Response

* Denotes Required Field