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Why Royal Mail PLC Should Not Be In Your 2014 ISA

For our ISAs, we should be using our new £11,760 allowance on shares that look cheap in companies set to do well, shouldn’t we?

And Royal Mail (LSE: RMG) is looking good, isn’t it?

Well, I don’t think Royal Mail is such a good ISA candidate. But first I’ll tell you what’s actually good about it.

First year

March 2014 will bring us our first year-end as a publicly listed company, with results due on 22 May, and things should be off to a decent start. There’s earnings per share (EPS) of 33.6p forecast, and on a share price of 578p that’s a price to earnings (P/E) ratio of 17 — only about the FTSE average, and the expected dividend yield is a slightly below average 2.9%.

royal mailBut the fun start with 2015 forecasts, which suggest a 32% EPS rise to take the P/E down under 13 — with the dividend growing to yield around 4.2%. And there’s another 13% rise in EPS pencilled in for 2016 to take the P/E down again, to 11.4, with a further dividend boost to 4.8% predicted. Pretty nice.

Longer term?

But to pass my ISA-candidate test, a share needs to be one I think can be stashed away and kept for 20 years or more. And with Royal Mail, we just don’t have that assurance at all.

Parcels accounted for 51% of the firm’s revenue at the nine-month stage this year, with revenue up 8%. But volumes were flat, and the growth was due to higher pricing.

Royal Mail has the lion’s share of parcels mail now, but other companies are increasingly doing things cheaper and more efficiently.

Better services

I received a parcel via Interlink Express last week, and I got live Google Maps tracking — it told me to the nearest 15 minutes when my driver, Neil, would be at my door. With Royal Mail, you’re lucky if their tracking keeps up with the right day.

And then I had to send something, and it was a bit too big to go as a Royal Mail small parcel. Someone recommended MyHermes to me, and they shipped it for about half the Royal Mail price — and that included picking it up from my home!

No vision yet

Now, that kind of service is technologically easy and I expect Royal Mail will catch up with it — and the shares might indeed turn out to be a good long-term investment. But right now, it’s still looking like a highly unionised dinosaur with smaller and nimbler mammals running around its feet.

And without the long-term clarity and vision, I think there are better places for that ISA cash.

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Alan does not own any shares in Royal Mail.