Does Royal Mail PLC Pass My Triple-Yield Test?

Roland Head takes closer look at Royal Mail PLC (LON:RMG). Does the postal group still offer attractive returns?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Like most private investors, I drip-feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

royal mailHowever, the FTSE 100 is up by 73% on its March 2009 low, and the wider market is no longer cheap. It’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over Royal Mail (LSE: RMG), to see if it might fit the bill.

The triple yield test

To gauge the affordability of a share for my portfolio, I like to look at three key yield figures –the dividend, earnings and free cash flow yield — and compare them to the returns available from alternative assets. I call this my triple-yield test:

Royal Mail Value
Current share price 565p
Dividend yield* 2.8%
Earnings yield* 5.7%
Free cash flow yield 4.9%
FTSE 100 average dividend yield 2.8%
FTSE 100 earnings yield 5.6%
Instant access cash savings rate 1.3%
UK 10yr govt bond yield 2.8%

*As Royal Mail hasn’t reported full-year results since it floated, and has had a lot of exceptional costs in recent years, I’ve based my figures on analysts’ consensus forecasts for the firm’s 2013/14 financial year, which ended on March 31.

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield. Royal Mail’s 5.7% forecast earnings yield gives it a P/E rating of 17.5, roughly equal with the FTSE 100 average, but not particularly cheap.

The most likely reason for this somewhat pricey rating is that City analysts are forecasting earnings growth of around 30% this year — current consensus forecasts are pencilling earnings per share of 42p for 2014/15, which gives Royal Mail shares a forecast P/E of 13.5.

Royal Mail’s prospective dividend yield of 2.8% is equal with the FTSE 100 average, but promises much more: the postal group is expected to increase its payout to around 23p in 2014/15, giving a prospective yield of 4.1% at today’s share price.

A rich valuation?

In my view, Royal Mail’s current valuation is pricing in a fair amount of good news for the 2014/15 financial year. It’s quite possible that the Mail will deliver, but in my view there isn’t much near-term upside to the shares from their current price.

Indeed, I was quite concerned by Royal Mail’s latest interim statement, which reported flat parcel volumes over the key Christmas period — a big concern, given that the fast-growing parcel market is Royal Mail’s main hope for growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland does not own shares in Royal Mail.

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

1 delicious penny stock I reckon can deliver juicy returns and growth

This food delivery penny stock has experienced a surge in performance and uptake recently. Our writer is excited by its…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares the day Tufan Erginbilgiç joined here’s what I’d have now

Harvey Jones is startled by just how fast the Rolls-Royce share price has risen since its transformative CEO took over.…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

How much do I need to invest in Lloyds shares to earn income of £1,000 a year?

Harvey Jones is getting income and growth from his Lloyds shares but wished he'd bought more of them. So he's…

Read more »

Illustration of flames over a black background
Investing Articles

Down 75%! Will the Saga share price ever be loved again?

The last few years have been incredibly difficult for those watching the Saga share price. But what does the future…

Read more »

Investing Articles

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »