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Why I’d ignore the Royal Mail share price and buy this other 5%+ yielder

There was terrific value on offer in the privatisation of Royal Mail  (LSE: RMG) back in 2013. Investors who participated in the IPO at 330p have seen a handsome return . The shares are currently trading at 465p (up 41%) and investors have also received dividends of 103.4p (a 31% yield on investment) for a total return of 72%.

At the current share price, which is down from highs of over 600p just a few months ago, Royal Mail trades on a modest 12 times current-year forecast earnings with a prospective dividend yield of 5.4%. However, I’m not tempted by the share price today. Let me explain why I’m avoiding the stock but why I’d buy mining royalties firm Anglo Pacific  (LSE: APF).

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Contrasting outlooks: near term

At a share price of 141p, Anglo Pacific has a market capitalisation of £256m, so is a considerably smaller company than £4.6bn FTSE 100 giant Royal Mail. However, it offers a similar prospective dividend yield and trades on a more attractive earnings multiple of eight times current-year forecast earnings. The fundamentals of the two businesses and their near-term and longer-term outlooks also persuade me that Anglo Pacific is a far more appealing investment proposition.

In its latest half-year results today, Anglo Pacific reported a 12% increase in revenue and a 15% increase in adjusted earnings per share (EPS). Ahead of the results, City analysts were forecasting an 11% increase in EPS for the year, so the company is well on track. In contrast, Royal Mail is forecast to post a mere 2% rise in full-year revenue and a 15% fall in adjusted EPS.

Longer-term outlook: Anglo Pacific

As well as the contrast in the immediate outlook for the two companies, I believe Anglo Pacific’s longer-term prospects are also significantly more promising than Royal Mail’s.

The royalty firm’s biggest asset is its interest in the Kestrel coking coal mine in Australia. A new joint venture has recently acquired Kestrel from Rio Tinto and the new owners are intent on doubling production over the next two to three years. This is good news for Anglo Pacific because the period coincides with mining being within its private royalty land, which would lead to a material increase in its royalty income.

The company has other royalty income streams from diverse mines and continues to invest in high-quality products, well-established jurisdictions, long mine life and Tier-1 operators. Its £37m acquisition of a 4.25% shareholding in Labrador Iron Ore Royalty Corporation, giving exposure to the 7% Labrador Iron Ore gross revenue royalty is the latest example.

I believe Anglo Pacific can deliver long-term top- and bottom-line growth, albeit with some fluctuation due to cyclical metals prices. But this seems infinitely more attractive than investing in a structurally challenged business like Royal Mail.

Longer-term outlook: Royal Mail

It’s become increasingly clear that delivering letters is a business that’s in long-term decline. Royal Mail’s latest quarterly numbers of a 6% fall in volumes and a 7% fall in revenue are indicative of the trend. Expansion of its parcel delivery business (including geographically) has offset the decline in letters but is producing only anaemic top-line group growth.

I believe parcel delivery systems will see radical change in the coming years. I’d back Amazon (currently both a customer and competitor of Royal Mail) to be a cutting-edge pioneer and Royal Mail to have to run fast just to stand still.

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G A Chester has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK owns shares of Anglo Pacific. 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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