Here’s why I’m avoiding the Royal Mail share price and buying this dividend stock instead

Paul Summers remains bearish on Royal Mail plc (LON:RMG) and suspects the dividend might still be at risk.

| 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.

Since announcing in May it would be slashing its dividend by 40% to help fund CEO Rico Back’s Journey 2024 turnaround strategy, shares in Royal Mail (LSE: RMG) have been treading water. That suggests many investors are giving the stock a wide berth until they see clear signs of an improvement in trading.

Based on the market’s rather lacklustre response to today’s short company update (released to coincide with its AGM), I can’t see this situation changing anytime soon. 

According to management, Royal Mail’s performance in the first quarter of its financial year had been as expected. The outlook for 2019/20 was reiterated and all targets left unchanged. Considering the ongoing decline in letter volumes and the recent fall in advertising revenues as a result of GDPR, I suppose that’s the best existing holders could have hoped for. 

Today, Royal Mail’s shares can be picked up for just 9 times forecast earnings. That’s certainly cheap relative to the market as a whole, but I’m not inclined to think it represents a ‘bargain’ for prospective investors

Aside from ongoing problems in the business and the threat of a Jeremy Corbyn-led government seeking to renationalise it, I don’t think the chances of a further cut to the dividend can be easily dismissed either.

Royal Mail has said it will pay 15p per share to holders in the new financial year. This gives a forecast yield of 6.9% — still rather high for a company going through such a sticky patch.

Moreover, the extent to which this payout will be covered by profits is already looking rather low. A slight deterioration in trading will be all that’s needed to put the payout at risk of being cut further. And as things stand, there’s nothing to reassure me that this won’t happen. Put simply, I suspect there are far better opportunities for generating income elsewhere.

Coincidentally, one such company also reported to the market today.

Rising dividends

It may not have the lure of some stocks, but I continue to believe kettle safety control supplier Strix (LSE: KETL) is a great option for dividend hunters. Today’s trading update for the six months to the end of June showcased the kind of stability Royal Mail can only dream of.

Strix’s management is confident the company has traded in line with market expectations for the full year, despite ongoing political and economic uncertainty.

In addition to saying it had maintained its global share of the kettle control market, the firm also remarked it hadn’t suffered “any material impact” from US/China trade tariffs, thanks to the flow of goods being maintained between the Isle of Man and China.

Perhaps most importantly for holders, the £300m-cap disclosed that recent performance and strong cash generation would allow it to pay a total dividend of 7.7p per share for the financial year just gone (a 10% increase on FY2018). Based on today’s share price of a little under 160p, that gives a trailing yield of 4.8%. 

Yes, the shares might be slightly dearer than those of Royal Mail, but a forecast price-to-earnings (P/E) ratio of just 10 looks great value to me, considering the healthy dividend increase and the prospect of new appliance launches later in the year further supporting earnings growth. 

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.

Paul Summers owns shares in Strix. 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.

More on Investing Articles

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 »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »