Royal Mail (LSE: RMG) seems to be the company that everyone loves to hate, and hates to love. Since its IPO in 2013, it initially faced intense criticism from politicians and the public because it looked like it had been sold off on the cheap. And then, as the share price plunged this year, management has faced criticism for a lack of commitment to the business.
I have had mixed feelings about Royal Mail ever since it was privatised. As I explained in my last article, the company is facing significant headwinds in the form of increasing competition and falling letter volumes. Management is also having to grapple with a high-cost base, which it’s struggling to reduce.
At the same time, there are some bright spots in the Royal Mail story. The company is putting a significant amount of time and effort into advancing the development of technology to help improve efficiency. Initiatives also involve reducing the amount of sorting that’s done before mail bundles are sent out, meaning that postal staff do more sorting while on their rounds instead. And the introduction of new technology is helping manage staff working hours and allocating overtime.
Changing with the times
Change can’t come fast enough for the group. In the first half of 2018, it managed a productivity improvement of just as 0.1%, well below the annual target range of 2-3%. Management has also revised its cost-saving target lower, from £230m to £100m.
One of the main sticking points for the business is worker relations, which have historically been pretty rocky (and still are). Earlier this year, Royal Mail narrowly avoided nationwide strikes after postal workers voted to approve a deal on pensions, pay and working conditions. The agreement stopped strikes, but it also limited the company’s ability to cut wages further.
It seems to me that improving the relations with its staff is now a key priority for management. Last week, Royal Mail ousted the head of its UK post and parcels division, a veteran of the company for 12 years, and appointed a new deputy chairman with a background in worker relations and operational transformation.
In my view, these two personnel moves suggest that the group is shaking up its management team to try and produce new ideas. It will take time for these changes to show results and, in the meantime, I think the shares will continue to lack direction.
An income buy?
There’s also the question of the company’s dividend. The stock currently yields 7.1%, which is significantly above the FTSE 100 average.
However, in my view, this payout is living on borrowed time. I think the cash being returned to investors could be put to better use by growing the group’s international arm, where there’s more room for growth, and improving operational efficiency.
So overall, I’m not a buyer of Royal Mail today. Even though the stock might look attractive from an income perspective, I reckon it’s only a matter of time before the dividend is cut. What’s more, there are plenty of other more attractive income investments out there.
