Royal Mail (LSE: RMG) is one of the UK’s most popular income stocks. And it’s easy to see why. Last financial year, the company paid out ordinary dividends of 20p per share to investors as well as a ‘special’ dividend of 20p per share. Here, I’m going to look at current dividend forecasts for Royal Mail for this financial year and next. I’ll also explain whether I’d buy the stock for my portfolio today.
Royal Mail dividend forecasts
Before I reveal the dividend forecasts for Royal Mail, it’s important to explain that the company’s financial year ends on 27 March. So the current financial year ends 27 March 2023 (FY2023) while the next financial year ends 27 March 2024 (FY2024).
As for the projected dividends, analysts currently expect Royal Mail to pay out 20.4p per share for FY2023. They then expect the group to pay out 22.2p per share in FY2024. These estimates translate to some high yields. At the current share price, the yield for FY2023 is 7.7% while the yield for FY2024 is 8.4%.
I need to stress, however, that these forecasts are just predictions. And like weather forecasts, dividend forecasts can be way off the mark at times. Especially after a recent dividend cut (Royal Mail cut its dividend several years ago) when a company doesn’t have a long-term dividend growth track record. Quite often, companies decide to pay out lower dividends in order to conserve capital or reinvest for growth. So, there’s no guarantee that Royal Mail will pay out these big dividends in the years ahead.
Would I buy Royal Mail shares today?
As for whether I’d buy Royal Mail shares today, I’m not convinced that they’re a good fit for my portfolio.
Don’t get me wrong, I like dividends as much as everyone else. Currently, I own quite a few UK income stocks in my portfolio, including Unilever, Diageo, and Legal & General.
However, when I invest in income stocks, one of the first things I look for is a long-term dividend growth track record. I want stocks that have consistently increased their payouts over time, as consistent dividend increases help to protect against inflation. Diageo is a great example of a company that has done this. It has increased its dividend every year for over 20 years now.
Unfortunately, Royal Mail doesn’t have the same kind of long-term dividend growth track record. That’s because it has cut its payout in recent years. This is a bit of a red flag for me. Often, companies that have cut their payouts in the recent past cut again if they run into trouble.
I also look for companies that are highly profitable. Here, I look at return on capital. Companies that generate a high return on capital tend to be good long-term investments because they earn big profits. This allows them to reinvest for growth while also paying dividends to shareholders. Royal Mail has quite a low return on capital. Over the last five years, it has averaged just 5.5%. By contrast, Diageo has averaged 14.4%.
Now, I’ll point out that Royal Mail shares do have a low valuation right now. So, they could end up being a solid investment.
However, all things considered, I think there are better dividend stocks to buy for my portfolio today.
