Today I am looking at why I believe Royal Mail (LSE: RMG) is an exceptional all-round stock selection.
A terrific investment package
Shares in Royal Mail have remained stable in recent days despite the business being referred to regulator Ofcom by rival courier TNT Post UK. The action relates to the former’s plan to raise wholesale mail prices above the rate of inflation from the end of March.
Regardless of the implications of any regulatory action, the country’s premier postal service continues to defy wider structural pressures in the mail market and punch strong revenues growth, a point which hasn’t gone unnoticed by the investment community. Indeed, January’s interims showed like-for-like revenues advance 2% during March-December, the firm shrugging off a 3% decline in turnover from letters.
Instead, Royal Mail’s changing approach to latch onto rocketing parcel traffic, which has included a move to size-based pricing, is helping to force revenues higher, and income in this area rose a solid 8% during the nine-month period. More than half of all turnover is now generated from the lucrative area of parcel delivery, and I expect this statistic to head higher as letter demand erodes and online shopping activity continues to rise.
Electrifying earnings expansion on the cards
Indeed, Royal Mail’s excellent performance at home, not to mention rocketing activity in foreign markets — its European GLS division reported revenue growth of 6% during March-December — is expected to propel earnings skywards in coming years.
After printing maiden earnings per share of 34.1p for the year concluding March 2014, City analysts expect earnings to expand 31% the following year to 44.7p. And a further 15% advance is expected in 2016 to 51.4p.
Such projections are send a P/E rating of 17.7 for this year — already below a prospective average of 20.2 for the complete industrial transportation sector — shuttling to 13.5 and 11.7 in the following two years. This stratospheric growth also creates price to earnings to growth (PEG) readouts of 0.4 and 0.8 for 2015 and 2016 correspondingly, well within bargain territory below 1.
Dividends poised to hit the high notes
These enormous growth rates are also expected to translate into mammoth dividend growth over the next few years. Forecasters expect the firm to shell out a 16.4p per share payout in 2014, with the payment anticipated to gallop to 24p next year — an eye-watering 46% increase — before rising an additional 17% in 2016 to 28.1p.
These anticipated payments crank the yield up from just 2.7% for 2014 — below the 3.2% FTSE 100 forward average — to 4% and 4.7% in 2015 and 2016 correspondingly. In my opinion Royal Mail is an exceptional pick for those on the lookout for great growth and income stocks at a decent price.
