The euphoria surrounding Royal Mail‘s (LSE: RMG) initial flotation in 2013 was a serious distraction, as it was always destined to be a dividend tortoise rather than a growth hare. Today’s trading update for the three months ended 25 June confirms that the tortoise is still on track.
Starter’s orders
It posted a steady start to the financial year, with underlying group revenue up 1% thanks to a strong performance by its European parcel delivery service GLS, offsetting a decline in revenues from its domestic parcels and letters service UKPIL. Chief executive Moya Greene said GLS continues to be the group’s driving force as it expands internationally to give the business greater geographical diversification, scale and reach. Its UK parcels business is winning new customers but letters continue to decline, although at a slower pace than expected.
GLS posted a healthy 5% rise in underlying volumes and 6% increase in revenues, with strong growth in most of its markets, including Italy. Revenue actually rose around 18% on a constant currency basis, including recent acquisitions. Spanish purchase ASM is performing well ahead of expectations, while its US additions are holding their own. Acquisitions are making the group’s international operations an increasingly important part of the overall business mix, which is to the good.
Bad letter day
UKPIL revenue was down 1%, with the 3% rise in parcel revenue upended by the 4% decline in total letter revenue. That would have been worse but for the general election, with the group enjoying higher-than-expected revenues from political party mailings. At least somebody was a winner in June. Parcel volumes rose 5% thanks to new contract wins and more traffic from existing customers, with Royal Mail Tracked services a highlight showing 39% volume growth.
There are shadows hanging over Royal Mail, including negotiations with the unions over the future of its defined benefit pension scheme. The group is in talks with Unite/CMA and the CWU, recently proposing increased annual pension contributions totalling around £400m. This will continue to cast uncertainty until the situation is resolved.
Snail Mail
Greene said Royal Mail’s cost avoidance programme is on track to deliver around £190m of UKPIL operating cost savings this year, with total net cash investment of around £450m. The stock market was happy to take delivery of today’s update, with the stock up 3.18% at time of writing. This does not negate the fact that recent performance has been dismal, with the share price down 21% over the last 12 months alone.
While GLS and UK parcels offer encouragement, Royal Mail is not a growth story. It is what it has always been, a tempting dividend income play. And it looks attractive on those terms, with a forecast yield of 5.7%, covered 1.7 times. Today also looks a good entry point, given the recent share price sell-off, which has left the stock trading at a tempting forecast valuation of just 10.4 times earnings.
Royal rewards
Be aware of a forecast 7% drop in earnings per share in the 2018 financial year, and another 1% in 2019. However, revenues are expected to rise steadily, the dividend looks safe, and Royal Mail remains one of the more attractive income plays on the FTSE 100 today.
