With Pearson (LSE: PSON) (NYSE: PSO.US) having sold The Financial Times to the Nikkei Group for £844m, there are now rumours regarding the sale of its 50% stake in its magazine title The Economist. In fact, Pearson has released a statement saying that it is in discussions with the Board and Trustees of the title regarding a potential sale, which means that it is relatively likely.

Of course, this is rather unsurprising, since for a number of years Pearson has been focussing on educational titles and products, rather than on media. This, it believes, will become a far more profitable space for the company, as it seeks to rejuvenate a bottom line that has been on the slide over the last three years, during which time Pearson’s share price has fallen by a rather disappointing 5%.

Looking ahead, Pearson is expected to increase its earnings in each of the next two years, with bottom line growth of 15% this year and 7% next year being pencilled in. As such, it trades on a price to earnings growth (PEG) ratio of just 1, which is very appealing at the present time and, with profit set to improve as it implements its new strategy, now seems to be a good time to buy a slice of Pearson.

On the up

Similarly, Sky (LSE: SKY) (NASDAQOTH: BSYBY.US) is also a company on the up. Its merger with Sky Deutschland and Sky Italia was a shrewd move that shored up its financial firepower at a time when competition in the media sector is hotting up. And although its bottom line is set to fall by 9% this year, next year is expected to be a very different story, with growth of 18% being forecast by the market.

As such, Sky’s PEG ratio of 0.9 holds great appeal — especially with its continuing to have the most differentiated pay-tv packages in the UK (owing to its sports rights and channels such as Sky Atlantic) and also being on the cusp of a more diversified offering that’s set to include mobile products.

Exceptional performance

However, in the media sector, ITV (LSE: ITV) seems to be an even better buy than Sky or Pearson. Certainly, its shares have performed exceptionally well in recent years, having made gains of 388% in the last five years. And there could be much more to come.

For example, ITV is forecast to increase its earnings by 14% this year and by a further 9% next year. Beyond that, further double-digit growth is very achievable, since the UK economy is continuing to move from strength to strength and, while online advertising has threatened the appeal of TV commercials, the latter remains a key part of spend among major businesses, with even social media companies now advertising on TV.

Whilst ITV’s PEG ratio of 1.4 may be higher than those of Pearson or Sky, with a sound strategy of providing more niche content across a wider range of channels, ITV appears to be well placed to deliver stunning share price growth over the medium to long term.

Here are three shares that should show a recovery in earnings in the near term:

BAE Systems

BAE Systems (LSE: BA), which has been suffering from government cuts to defence spending, is seeing a pick-up in new equipment and servicing contracts. Although the trading environment of the defence sector is still challenging, the market seems to be stabilising, as economic conditions improve and tensions in Eastern Europe and the Middle East increase.

Underlying EPS fell 10% to 38.3 pence in 2014; but there were signs that a recovery is in sight. BAE secured $4.3 billion worth of new orders from outside its core UK and US market, and its cyber-security business saw its order backlog grow 37% in the year. Overall, its order backlog totals 40.5 billion, which is worth 2.5 times its 2014 revenues.

Analysts expect underlying EPS will rise 1% to 38.3 pence this year, with growth accelerating to 6% in 2016. Although, there is no guarantee that BAE can return to its past growth trajectory, its long term servicing contracts and strong order book should mean that earnings would bottom out soon. Its valuation is also reasonable, with a forward P/E of 12.2 and a prospective dividend yield of 4.4%.

Pearson

Pearson’s (LSE: PSON) earnings has been steadily declining over the past three years, as its US education businesses struggled with lower spending budgets and changes to the curriculum.

Its transition from print to digital products, as part of its major restructuring programme, is finally showing signs of success. Online services for undergraduate and graduate learning programmes saw course enrolments rise 22% in 2014, with potential for further growth as more higher education institutions sign up to its services. Pearson’s innovative step towards digital products has so far not led to margins improvement, but this should soon change as it signs up more new customers, and because much of the costs are fixed.

Analysts expect underlying EPS will rise 16% to 77.1 pence this year, which gives its shares a forward P/E of 15.9. Its dividend should increase by around 7% to 54.8 pence, giving Pearson a prospective yield of 4.4%.

Kingfisher

Kingfisher (LSE: KGF), the owner of B&Q, Screwfix and other home improvement stores, is struggling with the weak trend in DIY spending and the rise of specialist format rivals, such as Toolstation, Wallpapermarket and Victoria Plumb. But, Kingfisher is fighting back with the expansion of its own specialist omni-channel format, Screwfix, across the UK and Germany. Sales for Screwfix grew 26.8% in its first quarter, outpacing overall growth of just 2.7%.

Many of its store layouts seem outdated, and the lack of synergies across its businesses is keeping its operating costs high. But this is something management is attempting to sort out, following the findings of its strategic review, by sharing infrastructure across its European businesses and standardising its processes.

With a strengthening UK and European economy, there is substantial potential for growth in the home improvements market. Analysts expect underlying EPS will rise 5% to 21.9 pence this year, which gives its shares a forward P/E of 16.0. Kingfisher also has a prospective dividend of 2.9%. 

This morning, the firm announced that its largest shareholder, asset manager DBAY Advisors, has increased its shareholding from 19% to 24%.

The move follows the recent publication of the firm’s full-year results. Although revenue only rose by 3% to £76.9m, diluted earnings per share rose by 11% to 13.1p, and the dividend rose by 8% to 4.2p.

These results have left Creston looking pretty cheap, in my view, with a trailing P/E of 10.5 and a yield of 3.0%, despite a strong outlook.

Looking at Creston’s figures has made me wonder whether this small, nimble firm could outperform FTSE 100 media stalwarts WPP (LSE: WPP) and Pearson (LSE: PSON) (NYSE: PSO.US).

A straight comparison

Let’s take a closer look at three key metrics which are likely to influence each of these companies’ share prices: earnings growth, valuation and yield.

Valuation

It’s often a good idea to demand a lower valuation when buying small cap stocks than their larger peers, as small companies tend to be more vulnerable to unexpected setbacks. Despite this, it’s fair to say that Creston looks significantly cheaper than WPP and Pearson on a P/E basis.

Earnings growth

Of course, being cheap is only attractive if earnings are expected to rise. Here are the latest forecast earnings per share (eps) growth figures for each firm:

Pearson is expected to report a sharp rise in earnings this year, thanks to more stable conditions and exchange rates in some of the firm’s key markets. The outlook also looks good at Creston, while WPP is expected to have a quiet year before earnings pick up again in 2016.

However, while Creston and WPP have both delivered annual average growth in reported earnings per share of close to 20% since 2009, Pearson’s reported earnings have fallen by an average of 6.8% per year during that time.

I’m more concerned about the long-term growth outlook for Pearson, whose main business is publishing, than for WPP and Creston.

Income

Dividends play a big role in investment returns, and all three of these companies have a strong record in this area:

WPP is the stand-out winner here, in my view, thanks to its above-average dividend growth rate. For long-term shareholders, faster dividend growth can often cancel out the effect of a higher initial yield over time.

Another consideration is that Pearson’s dividend is only expected to be covered by earnings 1.5 times this year, compared to 2.2 times for WPP and 3.1 times for Creston.

More conservative payout ratios often help to ensure that a firm’s dividend remains affordable over the longer term.

WPP vs Creston

In my view, the choice here is between WPP and Creston. As a long-term income stock I’d pick WPP, due to its greater size and diversity, but for a combination of growth and income, I’d choose Creston.

I believe Creston shares could deliver further gains over the next couple of years.

Let’s look at Shire (LSE: SHP), Pearson (LSE: PSON) and Carnival (LSE: CCL), three of the FTSE 100‘s best share-price performers over the last 12 months, to see how attractive they look.

Defensive growth

The pharmaceutical sector is doing well and there’s good reason for that. The fundamentals of the market flow in a favourable direction to support an investment in firms involved in the industry. The world’s population is aging and increasing, and treatments for ailments proliferate thanks to persistent research and development. Such healthy progress with demand, on the one side, and the industry’s ability to supply, on the other, adds up to an attractive environment for pharmaceutical firms to thrive and produce their cash-generative magic.

Investing in harmony with the general economic, social and demographic trends isn’t everything, but it does count for a lot in investing. If we find the pharmaceutical sector to be attractive then we could do much worse than to consider an investment in Shire. The firm builds cash flow and earnings through research and development, and by acquisition, and specialises in behavioural health and gastro intestinal conditions, rare diseases, and regenerative medicine. The directors reckon 2014 was a good year and, with the strength of the company’s development pipeline, it seems likely Shire will make good progress in the years ahead.

Recovery in education

Pearson generates most of its business as a publisher in the education sector. 2014 was tough, say the directors, as cyclical and policy-related pressures affected education, and in turn Pearson’s business, in North America and the UK, the company’s two largest markets.

Despite the cyclicality inherent in Pearson’s business, share-price progress has been good as the firm executed what looks like a cyclical recovery in profits from post credit-crunch lows. Now, with the shares at 1458p and a forward P/E ratio running around 17 for 2016, the valuation looks stretched given predictions of just 8% growth in earnings that year. If earnings growth doesn’t pick up, it’s conceivable that the valuation could contract, which would drag on forward share-price progress.

Cyclical spurt

Carnival owns most of the world’s best-known cruise brands, but the salient point about an investment in the firm is that the business of running cruises is highly cyclical, perhaps even more so than Pearson’s set-up. Carnival shares might have put on a spurt recently, but if we scope back and look at the longer-term share-price chart, it’s clear that an investment from 10 years ago will have gone almost nowhere.

The ‘trick’ with cyclical firms is to invest, or trade, or speculate, to catch the up-leg of the economic cycle. It’s very hard to do that, though, and a buy-and-forget investment in the firm is an unattractive proposition. Cyclical companies such as Carnival have their uses for us investors, in terms of shorter-term trading, but I reckon we need to watch our positions closely and close a trade if in the slightest doubt about share-price progress, because the threat of reversal bangs at the door constantly.

Pick of the bunch

Tesco’s well-reported fall from grace left many out of pocket as the share price collapsed along with profits. BHP Billiton’s sinking share price showed us the dangers of cyclicality as commodity prices tumbled taking the firm’s profits with them. Rather than picking those fallen shares to bet on recovery has this search of high-flying share prices thrown up a viable investment alternative?

Diageo

Drinks giant Diageo (LSE: DGE) has continued to steadily lift the dividend in recent years, even in spite of slowing sales in emerging markets causing earnings growth to slow, and even prompting a rare bottom-line dip in fiscal 2014.

Even though Diageo is expected to punch a further 4% earnings dip for the year concluding June 2015, a robust balance sheet is anticipated to push the full-year reward from 51.7p per share last year to 54.2p in the current 12 months. And an extra payout lift in 2016, to 58.2p, is currently pencilled in by City brokers, predicted alongside an 8% earnings bounce.

It is certainly true that these projections still create yields which trail the market average — predicted dividends for this year and next carry respectable-if-unspectacular readings of 2.9% and 3.1% for 2015 and 2016 correspondingly.

Still, I believe that Diageo’s massive exposure to developing regions — combined with its portfolio of market-leading products such as Johnnie Walker whiskey and Guinness stout — should underpin strong earnings and dividend growth once current macroeconomic turbulence in key markets abates.

Bovis Homes

On the back of the UK’s chronic housing shortage, I believe that Bovis Homes (LSE: BVS) is an exceptional selection for those seeking meaty dividends. And supported by ultra-low Bank of England interest rates, improving lending conditions, and government initiatives to help first-time buyers enter the housing market, I expect revenues to keep ticking higher across the homes sector.

Britain’s insatiable housing needs has enabled Bovis Homes to record many years of breakneck, double-digit earnings growth, and further advances to the tune of 28% and 20% are currently chalked in by the City for 2015 and 2016 respectively. As a result the construction specialists are expected to drive last year’s total payment of 35p per share to 39.9p this year, and again to 45p in 2015.

Payments for this year produce massive yields of 4.2% and 4.8% respectively, and I believe Bovis Homes’ exceptional earnings outlook — not to mention tremendous cash-generative qualities — to keep blast payouts higher for many years to come.

Pearson

Even in spite of persistent earnings weakness — the company has clocked up three consecutive, double-digit earnings dips in recent history — Pearson (LSE: PSON) has proved a resilient customer when it comes to lifting the dividend. And with the company having undergone a period of severe restructuring, I fully expect its revitalised operations to underpin shareholder confidence that payouts should continue rattling higher.

Indeed, the number crunchers expect Pearson’s bottom line to bounce back from this year onwards, and have pencilled in earnings improvements of 16% and 8% for 2015 and 2016 correspondingly. As a result the education specialists are predicted to hike last year’s 51p per share dividend to 54p this year and to 55.8p in 2016.

Such figures create attractive yields of 3.7% for 2015 and 3.8% for 2016. Pearson has undertaken a huge amount of heavy lifting to adapt to a changing world, but with a rising emphasis on digitalisation, not to mention the growing importance of emerging territories, I fully expect payouts to march higher in line with profits.

BP

Not surprisingly the effect of a nosediving oil price has crushed investor appetite across the fossil fuels sector in 2014, and shares in BP (LSE: BP) (NYSE: BP.US) slumped to their cheapest in two-and-a-half years just this week. Despite these top line pressures, however, a backcloth of aggressive asset shedding and cost reduction is expected to keep dividends at BP trekking higher during the medium term at least.

Indeed, this programme has enabled BP to lift the full-year payment at a compound annual growth rate of 13% during the past three years despite severe earnings volatility. In line with this trend, City analysts expect the business to initiate a further 5% dividend lift in 2014, to 38.9 US cents per share, despite a colossal 46% earnings slump.

And helped by a slight 2% bottom line recovery in 2015, BP is predicted to lift the total dividend an extra 5% in 2015 to 40.9 cents. As a consequence, a tremendous yield of 5.8% for 2014 marches to a staggering 6.1% for 2015, far above the current 3.3% FTSE 100 forward average.

Aberdeen Asset Management

Fund manager Aberdeen Asset Management (LSE: ADN) has been able to deliver reliable dividend growth for donkeys’ years now, as the nation’s rising army of private investors has turbocharged revenues at the firm. And with fragile investor sentiment having improved markedly in recent months, Aberdeen looks on course to enjoy tremendous turnover growth once again.

Propped up by a return to earnings growth this year — Aberdeen is expected to bounce from a 5% slip in the year concluding September 2014 to record a 6% rise in fiscal 2015 — the company is predicted to raise the full-year payout an impressive 9% to 19.6p per share.

Consequently, Aberdeen boasts a terrific yield of 4.3% for the current 12-month period, a figure which also obliterates a corresponding average of 3.6% for the complete financial services sector.

Pearson

Heavy restructuring at Pearson (LSE: PSON) is gradually gaining momentum as the business tries to pull itself away from the trading difficulties seen in recent years. With the company having bulked up its operations in digital, services and developing markets, 2015 is expected to herald a turning point in Pearson’s growth story.

Even though the publishing group is expected to experience a third consecutive earnings dip in 2014 — an 8% decline is currently chalked in by the City’s number crunchers — Pearson is still expected to lift the full-year dividend 5% to 50.2p per share. And a payment of 52.8p is estimated for 2015, up 5% from this year and supported by a robust 17% earnings uptick.

Based on these projections, a stonking yield of 4.1% for this year rises to an even more impressive 4.3% for 2015.

The company is undergoing an extreme restructuring to adapt to declining print volumes and the shift to digital consumption of media. Business generated from digital products and services more than doubled to 60% of revenues in 2013. The CEO John Fallon noted that restructuring was on track, and expects the strategy shift to create a “leaner, more cash generative, faster growing business from 2015”.

Pearson experienced a headline 6% fall in revenue in its largest market North America. Constant exchange rate (CER) growth of 2% was driven by good growth from Pearson Online Services and Pearson VUE.

Core markets, including the UK and Australia, reported a CER revenue decline of 7%. The Financial Times reached record paid circulation of almost 690,000 in the quarter, due to a strong growth in digital subscriptions, but a decline in print sales resulted in a slight decline in revenues year on year.

Penguin Random House, formed from the merger of Penguin Group and Random House in 2013, performed well in the quarter, and management expect to see benefits from their 47% ownership in 2015.

The company also announced that CFO of eight years Robin Freestone will stand down from his position in 2015 in order to explore a range of other interests. He said:

“I feel that eight years as CFO is long enough for anyone to play this type of role.  I am focused now on delivering our financial commitments in 2014 and developing our 2015 plans, supporting Pearson and my board colleagues in their search for a successor, and facilitating the arrival and induction of that person. After that I look forward to beginning a new phase of my career.”

Pearson reiterated full-year EPS guidance of between 62p and 67p. The expected consequences of the poor trading environment and continued restructuring activity were included in the prediction.

Dividend yields beat the competition

Undoubtedly, the effect of a difficult transformation programme has had a hugely damaging effect on publishing group Pearson’s investment appeal. But in my opinion, the business remains an attractive pick for those seeking lucrative dividend prospects, even though the firm still has much work to do on the restructuring front.

The owner of the Financial Times has continued churning out meaty year-on-year dividend growth during the past five years, even though earnings have fallen in the past couple of periods. Indeed, Pearson has hiked the annual payout at a compound annual growth rate of 7.8% since 2009.

And although earnings are expected to decline a further 8% this year, based on broker consensus, the business is still expected to lift the dividend a further 4% to 50.1p per share. And forecasters reckon next year will mark a turnaround in the firm’s beleaguered earnings picture, with a 16% improvement expected to underpin a 5% dividend rise to 52.6p.

This year’s predicted dividend creates a mouth-watering 4.4% yield, easily outstripping a forward average of 3.2% for the FTSE 100 as well as a corresponding reading of 3.4% for the complete media sector. And this rises to 4.6% for 2015.

Reshaping measures taking off

When looking at conventional metrics, Pearson may not be considered the most secure dividend contender on the market, however. Dividends are covered 1.4 times by predicted earnings through to the close of next year, some way off the safety benchmark of 2 times or above.

Meanwhile, the financial strain on severe restructuring is also playing havoc with the firm’s capital position — cash and cash equivalents rang in at £433m as of the end of June, down from £654m at the same point in 2013. Pearson intends to fork out £50m in net restructuring costs in 2014 alone, with a further £50m dedicated to organic investment.

However, the firm’s decision to hike the interim dividend 6% this month to 17p per share underlines the confidence that the firm has in its ambitious transformation plan. The firm is pulling out all the stops to reinvent itself for the digital age, putting a greater emphasis on online and services and moving away from traditional publishing. And these measures appear to be slowly taking off — sales edged 2% higher during January-June at constant exchange rates, to £2.05bn.

With the company also ploughing vast sums into expanding its presence in developing markets, I believe that a reshaped Pearson has the potential to offer exceptional growth and income prospects in coming years.

Pearson’s half-year figures this morning showed a 7% drop in sales to £2.05bn and the statutory loss before tax more than doubling to £36m. Around 60% of Pearson’s sales are in the US, and sales would have been 2% higher on a constant currency basis.

The first half of the year is traditionally Pearson’s weakest, and it still reckons that full-year adjusted earnings per share should fall between 62p and 67p. Admittedly this is quite a wide range, and it is based on exchange rates as at 28 February.

Growth in 2015 and beyond…

School curriculum changes and cyclical factors have had an impact on Pearson’s recent trading performance, but it sees conditions stabilising and growth returning in 2015 and beyond. As an indicator of this, the interim dividend was raised a respectable 6% to 17p per share.

This period was always likely to be a transitional one, with Pearson’s wide-ranging portfolio of businesses being reshuffled in 2013. Penguin merged with Random House (Pearson retains a 47% stake), Mergermarket was sold for £382m, and Group Multi, a Brazilian language training firm, was bought for around £500m.

The confident long-term outlook statement helped Pearson shares climb 3% higher to 1,130p this morning. At this level, they yield around 4.4%, although they are still well down on the 1,340p mark they began this year.

Total sales were up just 2%, at £5,177m. But underlying adjusted operating profit is down 23%, although the drop is only 9% if net restructuring charges are excluded. Both figures are slightly less bad at constant exchange rates, being 21% down and 6% down respectively.

The company attributes the fall in 2013 profit to a variety of factors, including the accounting impact of the Penguin Random House merger, lower margins in its North America market, sustained re-investment, and changes in revenue mix.

Adjusted earnings per share (after restructuring charges) are down 15%, to 70.1p per share, but the board is recommending raising the dividend by 7%, to 48p per share, which it says reflects its confidence in Pearson’s prospects.

The company says that it expects cyclical and policy-related pressures in its largest markets to continue in 2014, which will negatively affect revenues and margins.  It also warned that adjusted earnings per share will fall in 2014, to between 62p and 67p per share.

But Pearson is clearly hoping that speeding-up its restructuring to shift to digital platforms, a mix of learning and educational services, and an increased focus on fast-growing economies, will pay off in 2015 and beyond.

Commenting on the results, chief executive John Fallon said:

 “We are in the middle of what we believe will be a short, but difficult, transition — one that through our combined investment and restructuring programs will drive a leaner, more cash generative, faster growing business from 2015.

 “We are uniquely positioned to tackle some of the biggest challenges in global education including the transforming power of technology. I am particularly excited about the significant opportunity digital education offers for Pearson and the next generation of learners“

At 993p, Pearson’s share price is down a hefty 26% so far in 2014 — much of that fall following a negative trading statement in late January — although it’s only fallen 14% since this time last year, during which time the FTSE 100 index has risen almost 7%.  The five-year picture isn’t much rosier for Pearson shareholders, who have seen the share price grow only 50.5%, compared to a 77.5% increase in the FTSE 100.