Royal Mail: expert warns on firm’s dividend appeal after chief talks of competitive threat to universal service

22nd May 2014

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Royal Mail (LON:RMG) shares fell by 37.5p, or 6.5%, to 537.5p this morning as the firm warned that competitive pressure from rivals such as TNT Post UK – firms not burdened by the requirement to deliver a universal postal service – could significantly hurt revenues.

It warned this could hurt revenues by 200m in 2017-2018 when its rival plans a direct delivery service.

This has led to Capita Asset Services to warn on the firm’s dividend prospects.

Justin Cooper, CEO of shareholders solutions, Capita Asset Services says:  “Royal Mail delivered its first £133m dividend as promised, and we are comfortable with our £200m forecast for this year at least.  Most investors flooded into the stock when it floated because the yield looked so appealing.  That’s not the case any longer.  Even after the sharp fall in the share price after the results were published, the yield is not attractive compared to the rest of the FTSE 100. What’s more, with the management admitting competition is eating Royal Mail’s direct delivery lunch, future profits are at risk. That means future dividends could easily disappoint. Investors may conclude there are better places to find a reliable income.”

On the competitive issue, Royal Mail chief executive Moya Green said: “Royal Mail is required to deliver six days a week, overnight, throughout the whole country, to stringent quality standards and at a uniform, affordable tariff.

“We are also required to deliver any items TNT Post UK does not consider economic to deliver itself. If TNT Post UK is successful in delivering its stated objectives, this could threaten the fundamental economics of the Universal Service.”

The group’s pre-tax profit climbed to £363m from £304m a year earlier, a 19% increase. Operating profit rose 12% to £671m from £598m. Revenue was up 2% to £9.46bn. The group declared a 13.3p dividend for the second half of the year

This morning stock broker TD Direct Invest said that retail sellers still outnumbered buyers in April though by significantly less than in previous months.

Royal Mail said that parcel deliveries were its most significant growth area accounting for 50% of its growth and offsetting falls in letter delivery.

Revenue in UK Parcels, International and Letters (UKPIL) increased 2% to £7.7bn with letters down 2% and parcels up 7%.

General Logistics Systems (GLS) revenue was up 7% to £1.6bn and revenue from other businesses came to £18m. The costs of “transformation” rose to £241m from £195m due to the shift from letters to parcels.

Broker Panmure Gordon suggested regulators might intervene on delivery and competition issues.

It said: “Longer term prospects remain attractive, as we expect an element of regulatory intervention to protect RMG’s need to achieve a commercial return on its activities. Dividends are likely to rise, partly reflecting a likely rise in the payout ratio. Short term competition concerns are likely to be a drag on the share price in the near term.”

Stuart Welch, CEO, TD Direct Investing said “Our data shows that in April 2014, 53% of all our Royal Mail trading was sells, whilst 47% related to investors buying the stock. This is a real contrast with the initial frenzied activity last October, when 82% of Royal Mail trades were sales of shares, with just 18% being buys.

“TD customers selling Royal Mail stock at TD has generally declined since the IPO, apart from a small spike in January 2014. Clearly the issue is still in the news; the debate around CEO salary as well as the National Audit Office claiming that £750m of taxpayers money was lost as a result of the under valuation of the deal means it remains front of mind for retail consumers and investors.

“One of the more interesting questions initially being asked around the Royal Mail issue is whether initial investors were in it for short or long-term gain. It seems the former may be true.  Given the initial selling ratios we saw from our retail customers, and the fact that three months in, by January 2014, just 12% of Royal Mail’s shares were held by the “priority investors” chosen by the Government it’s fair to assume many opted for early gains.”

Graham Spooner, investment research analyst at The Share Centre recommends a ‘hold’. He adds: “Royal Mail reported results this morning that were broadly in line with expectations with operating profits up 12% boosted by its parcel delivery business. However, the company has highlighted the growing competition for this part of its business and yesterday announced it will trial a parcel delivery service on Sundays.

“Management continues to focus on cost cutting and improving company performance, however the increasing competition raises concerns. As a result, the company’s growth prospects in the short to medium term have been questioned, causing a divergence of opinion amongst analysts. This, alongside the current share price valuation, means we continue to recommend investors ‘hold’ Royal Mail.”

Royal Mail’s trial a Sunday service was been welcomed by Citizens’ Advice. Gillian Guy, Chief Executive of Citizens Advice, said: “A seven-days-a-week parcel service is good news for seven-days-a-week shoppers. More options for people to get deliveries or pick up their packages from a depot on a Sunday are good for those with busy lives.

“Royal Mail and Parcelforce providing Sunday services are encouraging steps toward a modern postal service that works for everyone. We hope the pace of innovation from Royal Mail and its competitors will continue to ensure they are meeting the needs of consumers.”

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