It was argued by many that shares in Royal Mail (LSE: RMG) were sold off too cheaply — and the rapid share price rise to 526p does tend to support the claim.
But that’s in the past now, and the question is whether there is more to come. The latest forecasts suggest that’s a Yes.
Early indications
We don’t have any past figures for earning per share (EPS) to compare with, but in its last full year before flotation, Royal Mail recorded a pre-tax profit of £324m. For the year just ended in March 2014, analysts are expecting to see that bumped up to £430m — and for 2015 they have a very nice figure of £551m penciled in, for a rise of 70% in two years.
And although we don’t have those historical figures, we do have some impressive EPS forecasts. If what they’re saying is indeed sooth, we should see EPS of 30.8p for the year just finished, which would put the shares on a P/E of 17. That might seem a little high, but the 35% growth predicted for 2015 would take earnings up to 41.4p per share and would drop the P/E to under 13.
However, in such early days, we don’t have all that many analysts with firm recommendations, and their individual forecasts are spread a little — you really need a bit of a track record to work out how the conversion of headline profits to earnings per share is likely to go.
And the consensus has dropped a little too — that 2015 EPS figure of 41.4p has slipped from a forecast of 45p just three months ago, and the 2016 guess has declined from 51.5p to 49p over the same period.
Cash is reality
But what about those all-important dividends?
Obviously there have been none in the past, but the company is planning to ramp up the annual cash handout pretty rapidly. There’s 16p per share currently being forecast for the year just ended, and that would yield 3.1%, which is not bad for starters.
For 2015, the City is expecting a 43% hike to 23p per share, for a 4.4% yield. Beyond that, forecasts don’t mean much, but a leveling at around 5% based on today’s share price looks likely.
Should you buy RM shares? Well, five analysts are currently saying Sell, compared to four saying Buy, so they’re pretty evenly split.
How do we rate the risk?
The thing is, there are unquantifiable uncertainties facing RM at the moment. They have a deal with the unions, but how long will that last? And what about increasing competition in the parcels market? Letters, after all, are declining in popularity and don’t make much profit anyway.
All in all, even with those attractive dividends, I’d be cautious on this one and put my money elsewhere.
