The Pearson (LSE: PSON) share price is up 15% so far in 2024. And it had a nice boost from a Q3 update on Tuesday (29 October).

CEO Omar Abbosh told us that “our focus on operational and financial performance has driven growth across all divisions this quarter and we are on track to meet full-year expectations.“

Shares in the education and publishing giant gained 3% in early trading, with the price up 5.8% since last Friday’s close.

What to watch for

The company expects to hit full-year market expectations. That suggests about 55.8p in earnings per share (EPS), and a price-to-earnings (P/E) ratio of 19.7.

Forecasts indicate more than 67p in EPS by 2026, to drop the P/E to around 16.

The forecast dividend yield is only 2.2%, rising to 2.6% based on 2026 forecasts. Investors seem unlikely to be eyeing up Pearson as an income stock. At least, not in the short term.

But EPS looks set to cover the dividends by about 2.3 times in the next few years. So there might be room for a future dividend focus if the firm’s earnings growth plans come good.

Strong cash flow

Pearson reported underlying sales growth of 3% in the first nine months. And it seems to be picking up, with a 5% rise in Q3. But how might it convert to the folding stuff?

For the full year, the board expects cash flow conversion of 95%-100%. That’s one of the things I look for in a dividend stock, even if the current yield is modest.

Many companies have recorded what look like impressive earnings over the years. But not all have been able to convert enough into actual cash. And shareholder income has suffered in the long term.

Pearson has also completed its £500m share buyback, hoovering up 7% of its issued shares. That’s a significant portion, and it should hopefully provide a material boost for future per-share measures.

AI in education

My main concern at the moment is the fairly high valuation. And it’s at a time when a lot of FTSE 100 stocks still look very cheap, with plenty of big dividends around.

I’m also thinking of artificial intelligence (AI), which Pearson is making increasing use of. To me, it feels like it might be a bit of a double-edged sword.

The company is “scaling AI across our products and services,” and spoke of “double-digit year-over-year billings growth in Higher Education products with AI study tools.“

That sounds great, and this seems like a business where AI could really have a serious impact. But at the same time, are investors buying in just because AI is mentioned? And maybe pushing the price up a bit?

On the fence

Pearson is in a highly competitive market. And cheaper (and even free) AI learning tools could yet throw a spanner in the works.

But, I do think Pearson’s whole offering is more than the sum of the parts. And we could see a growing competitive advantage. I’m undecided on whether to buy, but I’m watching (and thinking).