Royal Mail (LSE: RMG) has quickly established itself as one of the FTSE 100’s top dividend stocks, despite concerns about the group’s long-term earnings growth potential.
As concerns grow about the state of the UK letter and parcel market, Royal mail has been busy trying to establish itself as one of the industry’s most cost effective and efficient operators with international as well as national exposure. Management has slashed costs across the business and is also trying to monetise the group’s enormous property portfolio, which is worth hundreds of millions of pounds.
Expanding overseas
At the beginning of June, Royal Mail announced that conditional contracts had been exchanged for the sale of two of the seven plots on its Nine Elms site to Greystar for £101m in cash. These actions are not only designed to help improve the company’s balance sheet, but they will also help fund growth overseas.
At the beginning of April, the company invested around £11m in US overnight parcel delivery company Postal Express through its General Logistics Systems global business. For the financial year ending 26 March, General Logistics had operations in 41 European countries and seven states in the US. Revenue for the period from this division was £2.1bn, up 9% year-on-year, offsetting much of the decline in the UK business.
Royal Mail’s international expansion and balance sheet strengthening through asset monetisation should help the group maintain and increase its hefty dividend payout. Shares in the company currently support a dividend yield of 5.4% and the payout is covered twice by earnings per share, leaving plenty of payout headroom for dividend growth.
City analysts are predicting steady payout increases in the years ahead and based on current estimates, the shares should yield 5.9% for 2019. At the time of writing, shares in the international delivery company trade at a forward P/E of 9.6.
Weak growth high yield
Shares in IG Group (LSE: IGG) took a dive at the end of last year when city regulators announced they were planning to clamp down on the company’s core CFD trading market. Initially, IG’s response to this news was positive, as management believes the company’s core customer base is mainly professional investors who will likely be exempt from any change.
However, the market remains unconvinced and today shares in the company still trade around a third below the level before the announcement. City analysts are sceptical too, predicting little to no earnings growth for the company during the next three financial years. Nonetheless, even though no earnings growth is expected, the company’s dividend payout remains well covered (1.4 times by earnings per share) and at the time of writing the shares support a dividend yield of 5.7%. And just like Royal Mail, shares in the financial services company trade at a relatively attractive forward P/E of 12.5.
The bottom line
Overall, even though the City has turned its back on these two companies as their growth prospects dim, they both remain attractive income plays with 5%-plus dividend yields and payouts that are well covered by earnings per share.
