When I wrote about the FTSE 250 mail and parcel delivery company Royal Mail Group (LSE: RMG) earlier this month, its share price had fallen sharply. It fell even more this week, as investors’ growing diffidence with RMG was further reinforced by the overall market dip. The FTSE 100 closed below 7,000 yesterday, levels that haven’t been seen in over a year.
High dividend yield
RMG hasn’t been one for the growth investor for the last couple of years. Its share price has been falling fast after hitting a peak in early 2018. Conversely, its dividend yield has become increasingly impressive. It stands at 14.9% now.
This is the highest yield on offer among all FTSE 250 companies, save Tullow Oil, whose yield is at 16.9%. In fact, it compares favourably even to FTSE 100 shares, which on average have a higher yield than FTSE 250 shares. RMG’s dividend yield is lower than only that of the mining company EVRAZ, which has a 17.3% yield right now.
This is great news for investors in RMG, provided the group can maintain its dividends. There is some danger of declining dividends considering that its financials are on shaky grounds. But the company is taking steps to fend off the possibility of a loss in the future. One of these is an increase in stamp prices. It has also proposed a pay deal to its workers’ union, which it estimates is an increase of 16% from 2018 to 2023.
On shaky grounds
How far this will help RMG remains to be seen. The union is still clearly dissatisfied. It’s now going to vote on whether to strike or not. Late last year, management was able to stop the strike through court intervention. But the same challenge has reared its head again, suggesting that the dispute between the RMG management and its workers is still very much alive.
This is at a time when Royal Mail is undergoing a shift in its business. The letters’ business is on its way out. It expects a 75% drop in letter volumes between 2004 and 2024 and is transitioning more into its parcel business. Its future now depends on how successfully it makes the change, for which it has a plan in place for up to 2024. In its last financial update, it expressed concerns about being able to meet its turnaround plan targets. One of the reasons cited for this is uncertain economic conditions, which might or might not change in the near future.
For the income investor, this means that there is a risk to passive income from RMG. At the same time, the dividend yield is impressive and a calculated risk can pay off well. I would take heart from the fact that the company’s CEO, Rico Back, bought shares in early February; which can be a good sign for its prospects.
I am definitely considering buying RMG, but I’ll wait to see the outcome of the current dispute with workers is handled.
