Why Royal Mail PLC Should Be A Winner This Year

royal mail

Since Royal Mail (LSE: RMG) came to market at 330p, the share price has soared 78% to today’s 588p — the shares were clearly priced to sell at the time. But after that climb, is there more to come and will 2014 turn out to be a good year for shareholders?

Usually I’d take a look back at a company’s five-year history at this point, but this is Royal Mail’s first year as a quoted company and there are no per-share statistics available yet.

Profits rising

The company did record a pre-tax profit of £201m for the year to March 2012, and boosted that by 61% to £324m the following year. For this year there’s a pre-tax profit of £341m currently forecast, rising to £447m and £514m respectively for 2015 and 2016 — that’s a further 59% rise over three years, and it’s something most companies can only dream of.

Here’s what forecasts are looking like for the current year and the following two:

Mar EPS Change P/E Dividend Change Yield Cover
2014 34p n/a 17.2 16p 2.7% 2.1x
2015 45p +31% 13.1 24p +50% 4.0% 1.9x
2016 51p +15% 11.4 28p +17% 4.7% 1.8x

While a price-to-earnings (P/E) multiple of 17.2 for the year ending next month might seem a little high, it’s about in line with the FTSE average at the moment. And those big earnings-per-share rises that would drop it as low as 11.4 by 2016 look attractive, especially as the firm should be up to full-power dividends by then.

No strikes here

When Royal Mail first came to market, some feared that such a highly-unionised business might prove a little problematic on the industrial-relations front. But such fears appear to have been assuaged, at least in the medium term, with a new deal struck this month.

The Communication Workers Union has enthusiastically agreed a 9% pay deal over three years coupled with a number of other commitments concerning full-time staffing, curbs on outsourcing, job security, and other similar things. In return, the union has agreed to give up some of its rights to strike, which is good news for shareholders.

Parcels galore

The business is looking good too, despite email taking over from an increasing amount of paper communication these days. If letter volumes are falling, parcel deliveries are booming — all those online-shopping goodies have to be carried by someone if you’re not going to the shop yourself.

We want those dividends!

All in all, I’d say Royal Mail has got off to a cracking start for those fortunate enough to grab a few shares. And I think the future is looking good, especially those tasty dividends that are planned over the next couple of years — I can see the share price gaining some more in 2014 in anticipation.

Verdict: Growth in 2014, dividends later!

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> Alan does not own any shares in Royal Mail.