International Distribution Services (LSE: IDS) shares have had a crazy couple of years.
The firm changed its name from Royal Mail last year. It was a controversial move, to say the least.
Since then, shares have dropped 14% in value. That makes a staggering 51% fall since the start of 2022.
But a 51% discount might make this stock too cheap to pass up.
In the last month, the shares have climbed 13%. And I see a few reasons why that might just be the start.
The Royal Mail branding
IDS, which most people still know as Royal Mail, delivers parcels and letters up and down the UK.
In fact, the company still uses the red vans and logo with a crown on. And this branding – which goes back 500 years to Henry VIII – gives the company a unique competitive advantage in this country.
Combined with its long-established presence, it’s one that helps IDS to a 52% market share of the UK parcels market.
Net income up 125%
In terms of finances, the last two years have been good for the delivery firm.
Revenue of £12.7bn in 2022 is a 30% increase from 2017, and net income of £612m is a stunning 125% increase.
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
| Revenue | £9.8bn | £10.2bn | £10.6bn | £10.8bn | £12.6bn | £12.7bn |
| Net Margin | 2.8% | 2.5% | 1.7% | 1.5% | 4.9% | 4.8% |
| Net Income | £272m | £259m | £175m | £161m | £620m | £612m |
IDS’s international operations drove much of this, under the GLS name. GLS operate in Europe, the US and Canada and benefits from superb 10% margins.
The UK side of the business struggled more though. The downside of its historic position in the market is that the company has to commit to delivering mail to every single address in the country, regardless of cost. This is why overall margins for IDS are much lower.
A 7.31% dividend
One more reason for me to buy in is that IDS is one of the highest dividend payers on the FTSE 100. The current dividend yield is 7.31%.
With that amount, I’d get a return of over £700 on a £10,000 stake. That would suit me very nicely.
And with dividend cover of 1.5 – around 67% of earnings used on dividends – means the payouts were well covered by the profits the company makes.
£11m a day problems
The biggest thing that puts me off IDS is its ongoing labour disputes. The Commercial Workers Union (CWU) has proposed a total pay increase that will cost £1bn a year.
That’ll be a tough amount to find. Since 2017, the company hasn’t ever earned that amount in free cash flow
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
| Free cash flow | £367m | £545m | £129m | £608m | £827m | £557m |
The negotiations don’t stop there either. The CWU also wants a change to Sunday working hours and a reduction in staffing hours for over 55s.
With more industrial action planned this spring, it presents some real problems.
The previous strikes in 2022 cost IDS around £11m a day.
Am I buying?
All in all, that deflated 228p share price for IDS does look cheap.
And analysts at JP Morgan and Barclays seem to agree, both setting a price target of 250p, 9.6% higher than today.
However, the uncertainty around industrial action means I’ll keep IDS on my watchlist for now.
