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Should I Buy Royal Mail Holdings Plc?

A right Royal offer

The Royal Mail is almost 500 years old, and sometimes it feels like politicians have been threatening to privatise it for almost as long. Now, suddenly, it is happening. The government has announced it intends to push ahead with an initial public offering (IPO) within weeks. Should I buy the Royal Mail? Should you?

History is certainly on investors’ side. Past privatisations such as British Telecom (now BT Group) in 1984, British Gas (now BG Group, but owned by Centrica) in 1986 and Rolls-Royce and British Airways (both 1987), have transformed themselves into FTSE 100 powerhouses. Railtrack was a rare flop. 

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Alpha Mail

Don’t worry — you aren’t expected to buy the loss-making Post Office with its costly branch network, but delivery service the Royal Mail, which made a £403 million profit to April 2013 (although it has only turned a profit recently, after shedding 50,000 staff in the last five years).

As a former monopoly, the Royal Mail will have a massive competitive advantage. Email may have crushed its snail mail operation, but online shopping has turbo-charged the package delivery market, although Royal Mail faces tough competition from the likes of DHL. Royal Mail will remain the UK’s main postal provider. Prices will be regulated by Ofcom, which may limit profits.

I don’t see this as a rapid growth stock but a dividend delivery machine. Reports suggest management could pay out half of company profits to shareholders, starting with a £133m dividend early next year. Never underestimate the power of the dividend. If you had invested £1,000 in BT at launch, your shares would now have a face value of £3,800. But if you had reinvested all your dividends into the stock, you would have a whopping £15,495, according to research from Fidelity Worldwide Investments. That’s a return of 1,450%. BG Group has done even better, pumping out a total return of 4,878%, turning £1,000 into £48,878 with dividends re-invested.

Special delivery

The government will give away 10% of shares to around 150,000 Royal Mail employees, who can apply for more under an employee priority offer, with a minimum limit of £500. The rest of us can apply via the retail offer from a minimum £750. No maximum limit has been set as yet. You can buy shares direct from the government online, or fittingly, via a postal application. Otherwise, you can sign up through an online share dealing service. You can buy and hold them tax-efficiently inside your £11,520 ISA allowance, or a self-invested personal pension (SIPP).

Before investing, read the share prospectus carefully. It is easy to get sucked in by the noise surrounding an IPO. Don’t look to make a quick killing, but treat this as a long-term investment, dividends by special delivery.

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