Royal Mail PLC Profits Set To Soar By 70%

Earnings should grow rapidly at Royal Mail PLC (LON: RMG) over the next two years.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It was argued by many that shares in Royal Mail (LSE: RMG) were sold off too cheaply — and the rapid share price rise to 526p does tend to support the claim.

But that’s in the past now, and the question is whether there is more to come. The latest forecasts suggest that’s a Yes.

royal mailEarly indications

We don’t have any past figures for earning per share (EPS) to compare with, but in its last full year before flotation, Royal Mail recorded a pre-tax profit of £324m. For the year just ended in March 2014, analysts are expecting to see that bumped up to £430m — and for 2015 they have a very nice figure of £551m penciled in, for a rise of 70% in two years.

 And although we don’t have those historical figures, we do have some impressive EPS forecasts. If what they’re saying is indeed sooth, we should see EPS of 30.8p for the year just finished, which would put the shares on a P/E of 17. That might seem a little high, but the 35% growth predicted for 2015 would take earnings up to 41.4p per share and would drop the P/E to under 13.

However, in such early days, we don’t have all that many analysts with firm recommendations, and their individual forecasts are spread a little — you really need a bit of a track record to work out how the conversion of headline profits to earnings per share is likely to go.

And the consensus has dropped a little too — that 2015 EPS figure of 41.4p has slipped from a forecast of 45p just three months ago, and the 2016 guess has declined from 51.5p to 49p over the same period.

CashCash is reality

But what about those all-important dividends?

Obviously there have been none in the past, but the company is planning to ramp up the annual cash handout pretty rapidly. There’s 16p per share currently being forecast for the year just ended, and that would yield 3.1%, which is not bad for starters.

For 2015, the City is expecting a 43% hike to 23p per share, for a 4.4% yield. Beyond that, forecasts don’t mean much, but a leveling at around 5% based on today’s share price looks likely.

Should you buy RM shares? Well, five analysts are currently saying Sell, compared to four saying Buy, so they’re pretty evenly split.

How do we rate the risk?

The thing is, there are unquantifiable uncertainties facing RM at the moment. They have a deal with the unions, but how long will that last? And what about increasing competition in the parcels market? Letters, after all, are declining in popularity and don’t make much profit anyway.

All in all, even with those attractive dividends, I’d be cautious on this one and put my money elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own any shares in Royal Mail.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »