Shares in income favourite Royal Mail (LSE: RMG) rose over 3% this morning as market participants welcomed its latest update on trading.
Meeting the company’s own expectations, total underlying revenue rose 2% over the three months to 24 June, which also saw Rico Back assume the role of CEO at the FTSE 100 constituent.
Performance at its overseas-focused General Logistics Systems (GLS) was particularly encouraging. Recording an 11% rise in revenue, the company stated that growth had been achieved “in almost all markets” with strong performance in Italy, Denmark, and Spain. Double-digit growth was also registered in Poland and the firm’s other Eastern European businesses.
In contrast to this, business in the UK was mixed. Continuing a trend that won’t surprise those already invested, total letter revenue fell by 7%, while revenue from parcels came in 6% higher.
On a price-to-earnings ratio of just 12 before today, you might assume that Royal Mail is attractively priced, particularly given the stonking 5.2% dividend yield on offer. Whether this represents decent value on a long-term perspective is harder to say.
While stating that its outlook for the full year was unchanged and that a 4-6% fall in addressed letter volume was still expected, the £4.8bn-cap went on to remark that the latter “may fall outside the range in a period” due to the introduction of GDPR and ongoing business uncertainty. Although growth is expected to continue at GLS, the company also revealed that ongoing labour market pressures were likely to impact on margins going forward. That’s not particularly bullish in my book.
Regulator Ofcom — and its decision to investigate the Quality of Service provided by Royal Mail — is another potential thorn in the firm’s side. Despite remarking that it welcomed the opportunity to provide information on “a number of factors” that hindered performance and how it intended to address these going forward (what else could it say?), this issue is precisely why I’m wary of investing in stocks like Royal Mail.
As part of a diversified portfolio, I wouldn’t necessarily dissuade someone from building a stake (particularly as its share price is still 20% off the highs reached in May). As a buy and hold investment, however, it certainly wouldn’t be my first pick from the FTSE 100.
Commodity boom ahead
Trading at 10 times forecast earnings, shares in mining goliath Rio Tinto (LSE: RIO) offer a 6% yield in 2018, based on an expected 10% increase to the total payout. Note that this hike is over double that forecast from Royal Mail.
Today’s Q2 production figures looked decent enough with CEO J-S Jaques adding that operational performance had been “solid across most commodities, rounding out a strong first half performance for the Group“.
Aside from above, another reason I like Rio is based on the expected surge in demand for electric vehicles and renewable energy over the next few years — a development that’s likely to put a rocket under prices of several metals going forward, including copper. Indeed, recent reports suggest that the £70bn-cap is looking to splash the cash on assets to ensure it’s positioned itself for a likely boom in the red metal. Should it be successful in making a number of suitable acquisitions, I think the outlook for Rio — and its owners — could be very positive indeed.
For this reason, it certainly gets my nod over Royal Mail.
