The FTSE 100’s Hottest Dividend Picks: Royal Mail PLC

royal mailToday I am looking at why I consider Royal Mail (LSE: RMG) to be a premier dividend dealer.

Dividends expected to surge

Royal Mail’s share price following last autumn’s IPO remains the subject of much scrutiny. The price exploded in the weeks after launch, but prices have come back down to earth with a bang in recent months, a situation which I believe makes it a great value pick for savvy dividend hunters.

The ancient courier forked out a maiden dividend of 13.3p per share for the 12 months concluding March 2014. And City analysts expect the full-year payout to blast to 21.5p this year. A further 11% rise, to 23.2p per share, is pencilled in for fiscal 2016.

This year’s projection creates a monster dividend of 4.9%, comfortably taking out a prospective average of 3.2% for the FTSE 100. And next year’s predicted payment gets even better, producing a gigantic 5.3% yield.

Poised to charge at home and away

At first glance these projections may not appear to be the safest on the market, however. Although dividend coverage for this year and next can hardly be described as bone-chilling, registering at 1.7 times and 1.8 times prospective earnings for 2014 and 2015, these figures come in below the safety watermark of 2 times.

And concerns over projected earnings in coming years would have been stoked by Royal Mail’s announcement this month that volumes at its Parcels division edged just 1% higher during April-June, while revenues slipped 1%.

The company cited the effect of intensifying competition, as well as declining volumes from private customers and SMEs due to the switch to size-based pricing last year, on the department’s poor performance.

The gigantic growth of online shopping means that package delivery is set to become an increasingly-important arena for the business. But Royal Mail has a stash of measures under its sleeve for rollout during the second half of fiscal 2015, including making deliveries to customers on Sundays and receiving orders from online retailers at weekends, in order to halt the charge of the likes of TNT Post.

Meanwhile, Royal Mail confirmed that business on the continent continues to perform well — its GLS service in Europe saw both revenues and volumes surge 6% in the first quarter — while extensive cost-cutting at the firm came in “better than expected” during the period. The business remains on track to strip out £25m worth of expenses this year.

The firm will have to work extremely hard to stay ahead of the competition in the fast-growing parcels market, but I believe that Royal Mail has both the clout and the know-how to remain competitive both in the UK and overseas. With massive restructuring also set to bolster the bottom line, I believe that the courier should continue to offer appetising dividend prospects well into the future.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.