Parcel post and letter delivery provider Royal Mail (LSE: RMG) has seen its share price plunge more than 60% since May 2018 and now the dividend yield looks huge at around 10%.
I’ll start right off by declaring that I think Royal Mail is in a rubbish business when it comes to backing up a share on the stock market. Both its parcel and letter delivery services are low-margin. The letters arm is in structural decline, but Royal Mail is legally obliged to keep it running, and the parcel arm faces cutthroat competition that is almost guaranteed to keep the company struggling when it comes to earnings.
On top of that, industrial relations problems have plagued the firm and, generally, I can’t see anything on the horizon that is going to turn the company’s fortunes around. Judging by the share-price action on the market, I think many investors must have arrived at similar conclusions.
Weak figures
But maybe that juicy yield is too tempting to pass up. Let’s look at some figures:
|
Year to March |
2015 |
2016 |
2017 |
2018 |
2019 (e) |
|
Operating cash flow per share |
76.2p |
72.4p |
75.7p |
90p |
69.4p |
|
Net borrowings (£m) |
295 |
244 |
358 |
600 |
490 |
Net debt has been on a rising trend and operating cash flow is trending down. Both these measures are moving in the wrong directions to support a dividend payment that rises a little each year.
Indeed, the dividend has struggled to move higher and City analysts following the firm predict a flat payment ahead. That’s not surprising when you look at how earnings have declined recently as the following table shows:
|
Year to March |
2015 |
2016 |
2017 |
2018 |
2019 (e) |
|
Dividend per share |
21p |
22.1p |
23p |
24p |
23.8p |
|
Normalised earnings per share |
57.3p |
74.6p |
56.5p |
86.1p |
26.8p |
In the trading year to March 2019, which has just finished, earnings only cover the dividend payment a little over once. That’s an uncomfortably low level of cover from earnings and it suggests to me that the most sensible thing for management to do is to cut the forward dividend by around 50%. That is, unless by some unforeseen means earnings can be restored to former heights, but no-one is expecting that to happen any time soon.
Is it attractive with a 5% yield?
If I was considering investing in Royal Mail today, I’d assume that it will be yielding around 5% after a dividend cut. Is it still attractive? Certainly not to me. I reckon dividend-led investments need to be backed by an enterprise with operating cash flow capable of rising a little each year, by stable or falling debt and by generally rising earnings. Only then will I have some confidence that the dividend will rise going forward.
Royal Mail doesn’t tick any of those boxes so I’d avoid the stock and view it as risky.
