What Are Royal Mail PLC’s Dividend Prospects Like Beyond 2014?


Today I am looking at Britain’s premier mail courier Royal Mail‘s (LSE: RMG) dividend outlook past 2014.

Delicious dividends set for delivery

Royal Mail’s IPO was one of the biggest stock market stories of 2013, particularly as concerns that the national courier had been vastly undervalued abounded. Although the share price has surged 70% from the 330p per share launch I believe that the company still provides great bang-for-your-buck for dividend hunters.

City analysts expect Royal Mail to produce a maiden 16.7p per share dividend for the year concluding March 2014, before ratcheting the payout 44% in the following 12-month period to 24p. And forecasts point to further lucrative expansion over the longer-term, with an additional 17% rise anticipated in 2016.

This heady expansion pushes a dividend yield of 2.9% for this year to 4.2% and 4.9% in 2015 and 2016 correspondingly. This tallies up extremely favourably with a forward average of 3.1% for the complete FTSE 100.

Analysts reckon that a backdrop of surging earnings growth during this period is set to underpin robust growth in the shareholder payout. The number crunchers predict earnings per share of 33.9p per share to advance 33% in 2015, to 45p, before streaking 14% higher the following year, to 51.5p.

These projections leave the company with dividend coverage bang on the safety watermark of 2 times prospective earnings for 2014, although this slips slightly to 1.9 times and 1.8 times in 2015 and 2016.

I believe that Royal Mail’s position as Britain’s premier parcel service should deliver strong earnings, and thus dividend growth, in coming years. The company reported in last week’s interims that turnover from parcel delivery in the UK surged 8% during the January-September period, pushed by the move to size-based prices. This helped to drive like-for-like revenues across the group 2% higher.

And the courier advised that “we expect these trends, including the revenue and volume trends in UK parcels, to continue,” a promising precursor for future growth. Parcels now account for more than half of total turnover, and I expect this to continue heading higher as changing consumer habits — particularly the rise of online retailing — and a recovering UK economy underpin further growth in this highly-lucrative area.

As well, the company is also making heady progress on the continent, and its GLS division saw income rise 6% during January-September. Of course the slow-death of the British letter market remains a headache for the firm, but in my opinion the firm’s extensive restructuring to adapt to changing conditions in the courier market should keep earnings and dividend growth rolling at a stunning rate.

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> Royston does not own shares in Royal Mail Group.