MENU

The Pros And Cons Of Investing In Royal Mail PLC

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at Royal Mail Group (LSE: RMG) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

Parcels business keeps delivering

Royal Mail confirmed in this month’s interims that revenues advanced 2% during April-October, to £4.52bn, a result that  propelled pre-tax profit to £233m from £94m in the corresponding 2012 period.

In particular, the business was buoyed by excellent performance for parcel revenues, which rose 9% due to carriage price hikes. Packages now account for more than half of group turnover. Although parcel volumes were flat, as slowing e-retailing volumes during the summer offset growth in account parcels and Parcelforce Worldwide, I am confident that rising activity from online shoppers should drive volumes higher over the long-term.

Letters problems persist

However, Royal Mail continues to witness declining fortunes for letters carriage, and reported a 4% drop in revenues here in April-October. Meanwhile, a 6% drop in volumes was bottom of the company’s expected range of 4% – 6%.

In my opinion the advent of new technology should continue to weigh on the letters business moving forwards, as the likes of e-mail continues to make traditional means of communication redundant. Furthermore,  other changes prompted by technological advances — such as the switch to online statements by banking customers — have also whacked letter demand, Royal Mail has noted.

Chunky dividends on their way

Royal Mail underlined its prospects as an exciting dividend selection in this week’s interims when it announced that it expected to pay a final £133m dividend for the current year, two-thirds of the notional £200m payout which management reckons it would have forked out had the company been listed for the full fiscal year.

And a backdrop of accelerating earnings in coming years — brokers expect earnings per share to advance 8% and 13% in 2014 and 2015 respectively — to result in increasingly-appetising payouts. Indeed, the full-year dividend is anticipated to advance strongly next year, to 21p, providing a dividend yield of 3.8%. This compares favourably with a 3.2% average forward yield for the FTSE 100.

Industrial action still casting clouds

Royal Mail is having to undertake a massive restructuring programme to undergird future growth, but news that transformation expenses came in lower than expected during the first half, at £70m versus £120m last year, cheered investors.

However, the company said that the better-than-expected result owed much to “delays in transformation expenditure related to the industrial relations situation,” Royal Mail having narrowly averted widescale strike action this month. But as talks with unions and staff are still to be concluded, the threat of fresh action is still very much a reality, particularly given the carrier’s history of crippling industrial action in recent years.

A shrewd stock pick

Still, I believe that Royal Mail is in great shape to deliver solid earnings growth well into the future. Striding progress at its parcels business is well on track to keep moving higher, in my opinion, while its ambitious restructuring programme should leave it in great shape to beat away the competition and remodel its service for the demands of the modern mail customer.

But whether or not you like the looks of Royal Mail Group, and are looking for other lucrative payout plays to really propel the income from your stock portfolio, I recommend you take a look at this exclusive, in-depth report about another FTSE 100 high-income opportunity.

The blue chip in question offers a prospective dividend yield comfortably north of 5.5%, and has been declared "The Motley Fool's Top Income Stock"! Click here to download the report now -- it's absolutely free and comes with no further obligation.

> Royston does not own shares in Royal Mail.