Why You Might Buy Pearson

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LONDON -- I'm convinced the ongoing shift from paper-based information to digital content is the major trend of the current decade. And while some companies see this trend as a threat to their business, I have identified one blue chip that is profiting from the "digital revolution." Global publishing giant Pearson  (ISE: PSON.L) has been investing heavily in digital content, while its rivals haven't.

Digital competence
After starting out as a construction company during the industrial revolution, Pearson is now a conglomerate made up of three world-leading businesses: Pearson Education, Penguin Publishing, and the FT Group.

Pearson is presently at the forefront of the transformation in educational provision as teaching and physical content shift online. The firm's long-term investments in digital provision are now beginning to bear fruit: Across the group, digital revenues currently account for 33% of sales. This is a substantial increase from 2007, when digital sales made up only 21% of revenues. Furthermore, in 2011, Penguin saw the sales of e-books double from the previous year to constitute 12% of the division's revenues. In addition, the FT's Web app had attracted more than 1.3 million visitors and has won the Global Mobile award for "Best Mobile Innovation for Publishing."


Defensive qualities
Pearson's education division accounts for the largest proportion of the group's operating profit by far, standing at 80% in 2011. Of this, 67% stems from the firm's biggest market, North America, leaving Pearson dependent on U.S. education spending.

But the growth in online education provision, on which Pearson has a clear lead over its competitors, should drive demand for its products. Moreover, Pearson's growing exposure to emerging economies, which accounted for 11% of total sales in 2011, should offset slower growth in its main market. Paradoxically, sluggish economic growth can actually help Pearson. You see, a weak U.S. economy, coupled with an anemic job market, encourages more students to enroll as they seek to protect themselves from the economy.

Elsewhere, the FT division makes up only 8% of the group's operating profits, and this subsidiary's digital investments are beginning to pay off, too. For example, profits here grew by 27% from 2010 to 2011. The Financial Times and the Economist (of which Pearson owns a 50% stake) are being primarily driven by strong growth in digital subscription revenues. Digital services now account for 47% of the FT division's revenue, up from 25% in 2007.

Let me add that Pearson's exposure to the U.S. leaves it vulnerable to currency risk, as approximately 60% of its sales and profits are earned in dollars.

Financial strength
At the heart of investing is sharing in the profits of successful businesses through the distribution of dividends. Pearson looks a decent defensive share to me: At 11 pounds, its forecast dividend yield stands at a healthy 3.8%. What's more, the group has grown its dividends per share every year for the last 20 years.

Despite the banking crash and recession, the last few years have seen Pearson consistently advance its operating profit -- appreciating by just more than 80% from 2007 to 2011. Its balance sheet does not look too bad, either, carrying just 500 million pounds of net debt at the end of 2011. The firm says it has 1 billion pounds of headroom to seize future growth opportunities through selective acquisitions, too.

All told, at a current forecast price-to-earnings ratio of 13.2, I believe Pearson's financial strength and digital focus make it an attractive prospect. In these volatile times, Pearson looks a dependable media stock.

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At the time this article was published Christopher does not own any share mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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