5 Reasons To Buy Royal Mail Holdings plc

I’ve just spent the last few days studying Royal Mail and I’ve concluded the shares might be worth buying – at least for the short term.

£750 gets you in on day one

For those of you who missed the news, last week the government announced plans to sell Royal Mail to investors through a flotation.

Essentially, the shares will start trading in the next few weeks and ordinary investors will have the opportunity to buy into the postal service on day one for a minimum of £750.

So, should you invest?

Well, I reckon there are five good reasons to buy. But as always, there is a bear case for each bull point!

1. The taxpayer is on the hook for your postie’s pension

First off, Royal Mail’s balance sheet does not look too bad… now that the group’s gargantuan pension liabilities were all shifted onto the poor old taxpayer last year.

In fact, Royal Mail looks set to become one of the few FTSE 350 firms that can boast a pension-fund surplus.

What’s more, the group’s net debt is a manageable £904m plus there are freeholds with a £787m book value all in at cost, which could perhaps offer a property angle to the business.

That said… Royal Mail has a residual exposure to the retirement scheme, so is not totally off the hook. Selling postal depots may not be easy, either.

2. Sales have held up despite fewer letters

Royal Mail’s top line has held up surprisingly well.

Between 2008 and 2012, turnover from UK letters, parcels and junk mail bobbed around the £7bn mark, while growing parcel numbers and higher stamp prices pushed revenues up 6% to £7.6bn during 2013.

In fact, parcel sales gained a remarkable 9% last year and now represent almost half of Royal Mail’s turnover.

That said… Royal Mail’s letter postbag has shrunk 30% since 2007, while the group remains lumbered with the obligation to collect and deliver anywhere in the UK. Competition is also rife in the parcel sector.

3. The government likes to sell low

Many past privatisations have worked well for investors, as politicians sell cheap in the hope of votes. (This government isn’t planning on 150,000 postal workers receiving free shares only for the price to then plummet!)

Maybe Royal Mail could be another Associated British Ports, which was sold off during 1983 and delivered annual returns of 18%-plus – before dividends – until it was bought in 2006. Or another British Gas, which has turned £1,000 into £16,000 according to Hargreaves Lansdown.

That said… the government has offloaded several investment disasters, including Railtrack, British Energy and AEA Technology.

4. Projected dividend suggests bumper income for investors

With Royal Mail reporting free cash flow of £334m during 2013 and projecting an underlying £200m dividend for 2014, the business seems keen to return surplus cash to shareholders.

In fact, recent trading by spread-betting firms suggests Royal Mail’s market cap could be something approaching £3bn, which may provide a 6%-plus income based on that aforementioned dividend.

That said… Royal Mail’s financial history is a mess, restructure costs continue to rack up, and the group reported much lower free cash flow during 2012 and 2011.

5. The no-nonsense boss is ‘always thinking about profit’

Chief executive Moya Greene has some form turning around postal services, having trebled profits during her stint at Canada Post.

Indeed, the president of the Canadian Union of Postal Workers may have unintentionally recommended her to prospective Royal Mail investors when he said to the Financial Times:

“She was a neoconservative ideologist. Always thinking about profit. She was always going after disabilities, sick leave, pensions. It was like dealing with a private CEO instead of a public CEO.”

That said… Staff aren’t happy, and the Communication Workers Union has proposed strike action if current talks about pay, pensions and privatisation with Royal Mail prove fruitless.

The tradition of ‘stagging’ privatisations from the 1980s

So there you go, five good reasons to buy Royal Mail shares… although each comes with strings attached!

Whether you buy, of course, is up to you. For me at least, I feel there are enough positives to justify a £750 flutter on the flotation…

…and if the price does rise shortly after the listing, I’d understand completely if you then follow the tradition of ‘stagging’ privatisations from the 1980s and decide to sell sooner rather than later!

Foolish final thought

If you are looking for another income opportunity, this exclusive in-depth report reviews a different yield possibility. 

Indeed, this alternative offers a 5.6% income, might be worth 850p versus around 785p now -- and has just been declared the "Motley Fool's Top Income Stock For 2013"!

Just click here for the report -- it's free.

> Maynard does not own any share mentioned in this article.