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This FTSE 100 dividend stock has sunk recently. Is this a brilliant dip-buying opportunity?

Royal Mail (LSE: RMG) may not have recovered from the sharp sell-off that accompanied the period surrounding its full-year results statement last week, but I reckon this gasp for breath represents a tasty little buying opportunity.

The FTSE 100 courier’s share price charged almost 70% higher in the six months to the record peaks above 630p per share hit earlier in May. With restructuring continuing and the critical e-commerce sector becoming ever-mightier, there is plenty of scope to expect Royal Mail to charge higher again.

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Parcel volumes still impressing

Yet the mail mammoth’s share price continued its downdraft following last week’s release after advising that, with the General Data Protection Regulation (GDPR) swinging into being later in May, the predicted decline in letter volumes this year would be at the top end of an estimated range of between 4% and 6%. Letter volumes dropped 5% in the year to March 2018.

Royal Mail added that, should business uncertainty persist, the drop could even exceed these estimates.

While disappointing, this guidance does little to change the brilliant long-term earnings potential that it carries on the back of its parcels divisions at home and abroad. Indeed, strength in this area helped group turnover barge through the significant £10bn barrier for the first time in the past fiscal period.

The business saw parcel volumes in the UK rise to four-year highs last year and on an underlying basis, they rose 5% from fiscal 2017, while revenues rose 4% year-on-year. Royal Mail said that the increase was thanks to business wins from new customers as well as rising volumes from existing clients.

But this solid performance paled when stacked up against what its GLS division in Europe was doing. Underlying revenues here leapt 10% in the last fiscal period to £2.56bn, while volumes grew 9%, the top line helped by recent acquisition activity.

Market-beating yields

It comes as little surprise therefore that Royal Mail says it “will continue to focus on cost avoidance and parcel revenue growth in the UK and through GLS.” The departure of chief executive Moya Greene has thrown a little uncertainty into the works. But I believe the company’s positive investment case remains intact, and City brokers share my viewpoint.

Current forecasts expect the courier to endure a 9% earnings dip in fiscal 2019 as colossal restructuring costs weigh. However, a 3% improvement is predicted for the following year as parcel volumes head higher and the impact of its cost-slashing initiatives bear fruit.

What’s more, Royal Mail’s impressive cash generation is expected to keep driving dividends skywards. The business hiked last year’s payment 4% to 24p per share, and payouts of 24.7p and 26p are predicted for fiscal 2019 and 2020 respectively. Consequently meaty yields of 4.5% and 4.7% can be enjoyed.

At current prices, Royal Mail can be picked up on a forward P/E ratio of 13.4 times, well inside  territory of 15 times or below that indicates great value. While its letters business will remain under pressure for a long time, this is far, far too cheap in my opinion, given the brilliant revenues outlook for its parcels operations.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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