Why I’ve Bought Royal Mail Plc

Like thousands of other investors, I have bought into Royal Mail Group (LSE: RMG).

I have bought not only because there is a short-term profit, but because I think there are strong long-term prospects for the company.

An industry in decline?

At first sight, the postal industry is an industry in decline. The internet means that the art of writing and sending a letter has been replaced by the typing of a quick email. How many times have you posted a letter this year? Even junk mail has been replaced by junk email.

But while far fewer letters are posted out, these days far more parcels are sent. That’s because people are buying more and more things from the web, and less and less from the high street.

Thus we are heading towards a future where virtually no letters are sent, but lots of parcels are sent. As the parcel business is actually a higher margin business than letters, I think this is actually a positive for Royal Mail.

What’s more, there is considerable scope to expand Royal Mail’s market beyond the UK business. A privatised company will have the freedom to develop a new global courier service to rival UPS and DHL, which would add to the increasing profits from the UK postal business.

A leaner, more efficient, more premium business

A leaner, more efficient, more premium business is in prospect. If the company can shake off its rather traditional, dowdy image, it has at its heart an unrivalled UK distribution network, work force and infrastructure. If it can transform itself into a firm that meets the needs of customers who buy most of their shopping over the internet, as well as businesses that need a fast, effective courier service, then I would expect its shares to outperform.

There is already a model for success that Royal Mail can follow. When Deutsche Post was privatised, it was a bloated, inefficient state business with little international presence. Since then it has refocused, bought and integrated the DHL courier business, and it is now the world’s leading postal service.

If Royal Mail can transform itself in a similar way, I suspect that investors who have bought in now will enjoy both a rising share price and a juicy dividend. That’s why I’ve bought Royal Mail.

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> Prabhat owns shares in Royal Mail.