What's going on?

Pearson, the world�s largest publisher of educational material, saw its share price fall 30% on Wednesday after the company once again told investors that it would make less profit than expected. That�s a huge selloff!

What does this mean?

Pearson is in the business of selling textbooks, but demand for textbooks has been hit hard by a shift to digital resources. Unsurprisingly, Pearson has already been trying to change its focus to digital products, but it�s failing to make up for the decline in its traditional print business. Falling enrolment in US colleges is not helping, hurting sales of both Pearson�s traditional and digital products. Increasing use of textbook sharing services are also eating into Pearson�s sales.

Why should I care?

The bigger picture: Investors do not like surprises � and they really don�t like surprising cuts to their cash payouts.

In another blow to investors, Pearson said that it would decrease its annual cash payment to shareholders (a.k.a. dividend). As Pearson�s dividend declines, it risks losing a dedicated investor base that targets companies that pay a high dividend (typically called �dividend funds�). Also, Pearson�s CEO had recently talked up the company�s prospects, so Wednesday�s announcement might have caught some investors off-guard, making them more likely to sell the stock.


For the stock: The turnaround plan is to double-down on selling digital products.

Last year, Pearson sold the Financial Times and its stake in The Economist in order to raise cash. On Wednesday, it said it also wants to sell its 47% stake in publisher Penguin Random House. The cash is meant to help the company weather the current storm while it tries to turn itself around by focusing even more on selling digital educational resources. Investors, however, appear to be sceptical of this strategy, as reflected in Wednesday�s stock selloff.