What Dividend Hunters Need To Know About Royal Mail PLC

Today I am looking at whether Royal Mail (LSE: RMG) is an appealing pick for those seeking chunky dividend income.

First-class payout prospects ahead

Royal Mail has hit the headlines again in recent days, with business secretary Vince Cable hauled in by MPs to once again answer allegations that the firm was vastly-undervalued when shorn off by the government back in October.

But I believe that Britain’s prestigious mail service also deserves to grab the limelight on the back of its stellar dividend prospects.royal mail

The City’s number crunchers anticipate that Royal Mail will shell out a maiden dividend of 16.1p per share for the year concluding March 2014, results for which are due on Thursday, May 22. Such a payment would generate a yield of 3.1% — marginally below the FTSE 100 forward average — although the expectation of chunky hikes in the medium term drive yields much higher.

Britain’s premier courier is expected to lift the full-year payout 44% this year to 23.1p, a scenario which creates a meaty 4.4% yield. And a further 17% rise expected in fiscal 2016, to 26.9p, drives the yield to 5.2%.

Reshaping plan boosts outlook

Such massive payout expansion is underpinned by strong earnings forecasts for 2015 and 2016, with growth anticipated to ring in at 35% and 18% for these years. These figures create dividend coverage of 1.8 times forward earnings through to the end of 2016, just below the widely-regarded security threshold of 2 times.

The firm is also implementing a strict restructuring programme to boost earnings and consequently future payout prospects. And although the action courts the prospect of fresh industrial strife, the scheme promises to significantly boost efficiency over the long-term. Indeed, a planned net reduction of 1,300 staff is expected to deliver annualised cost savings of around £50m.

Elsewhere, Royal Mail is also making huge strides in the red-hot packages market, and surging online shopping demand promises to keep the its Parcels division extremely busy in coming years — indeed, the courier saw revenues rise 8% during April-December, helped by its decision to move to size-based pricing.

With the company’s GLS overseas division also pulling up trees, and ready to ride resurgent economic conditions across Europe, I believe that Royal Mail is in great shape to enjoy solid earnings and dividend growth.

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Royston does not own shares in Royal Mail.