The Motley Fool

Here’s why I’d consider this high-yielding FTSE 100 giant over Royal Mail

Shares in income favourite Royal Mail (LSE: RMG) rose over 3% this morning as market participants welcomed its latest update on trading. 

Meeting the company’s own expectations, total underlying revenue rose 2% over the three months to 24 June, which also saw Rico Back assume the role of CEO at the FTSE 100 constituent. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Performance at its overseas-focused General Logistics Systems (GLS) was particularly encouraging. Recording an 11% rise in revenue, the company stated that growth had been achieved “in almost all markets” with strong performance in Italy, Denmark, and Spain. Double-digit growth was also registered in Poland and the firm’s other Eastern European businesses. 

In contrast to this, business in the UK was mixed. Continuing a trend that won’t surprise those already invested, total letter revenue fell by 7%, while revenue from parcels came in 6% higher. 

On a price-to-earnings ratio of just 12 before today, you might assume that Royal Mail is attractively priced, particularly given the stonking 5.2% dividend yield on offer. Whether this represents decent value on a long-term perspective is harder to say.

While stating that its outlook for the full year was unchanged and that a 4-6% fall in addressed letter volume was still expected, the £4.8bn-cap went on to remark that the latter “may fall outside the range in a period” due to the introduction of GDPR and ongoing business uncertainty. Although growth is expected to continue at GLS, the company also revealed that ongoing labour market pressures were likely to impact on margins going forward. That’s not particularly bullish in my book.

Regulator Ofcom — and its decision to investigate the Quality of Service provided by Royal Mail — is another potential thorn in the firm’s side. Despite remarking that it welcomed the opportunity to provide information on “a number of factors” that hindered performance and how it intended to address these going forward (what else could it say?), this issue is precisely why I’m wary of investing in stocks like Royal Mail.

As part of a diversified portfolio, I wouldn’t necessarily dissuade someone from building a stake (particularly as its share price is still 20% off the highs reached in May). As a buy and hold investment, however, it certainly wouldn’t be my first pick from the FTSE 100.

Commodity boom ahead

Trading at 10 times forecast earnings, shares in mining goliath Rio Tinto (LSE: RIO) offer a 6% yield in 2018, based on an expected 10% increase to the total payout. Note that this hike is over double that forecast from Royal Mail.

Today’s Q2 production figures looked decent enough with CEO J-S Jaques adding that operational performance had been “solid across most commodities, rounding out a strong first half performance for the Group“.

Aside from above, another reason I like Rio is based on the expected surge in demand for electric vehicles and renewable energy over the next few years — a development that’s likely to put a rocket under prices of several metals going forward, including copper. Indeed, recent reports suggest that the £70bn-cap is looking to splash the cash on assets to ensure it’s positioned itself for a likely boom in the red metal. Should it be successful in making a number of suitable acquisitions, I think the outlook for Rio — and its owners — could be very positive indeed.

For this reason, it certainly gets my nod over Royal Mail.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Paul Summers 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.