Things aren’t getting any better for long-suffering Royal Mail (LSE: RMG) shareholders, with the company in the list of the FTSE’s biggest fallers Tuesday morning on a 6% dip in early trading.
Given the increasingly competitive nature of the delivery business, investors will have been disappointed by the CWU ballot that overwhelmingly came out in favour of industrial action.
There might not actually be any such action, and the company is still in mediation with the union. However, just the threat of it could be enough to send customers off to other shippers, and if the threat carries on long term, it can have an impact on customer loyalty that is hard to undo.
If we want to quantify the bearish sentiment surrounding the prospects for Royal Mail as a business, we need look no further than the current share valuation. After earnings per share declined by a third in the year to March 2019, analysts have a further 24% dip on the cards for the current year before they expect things to steady after March 2020.
That puts the shares on a forward price-to-earnings ratio of just 9.5 this year, dropping even lower to 8.6 next – and that’s even with forecast dividend yields of around 7%. But the mooted 2020 dividend of 15p per share would represent a 40% cut from the 25p paid this year, and as it would still only be covered 1.5 times by predicted earnings, there have got to be fears that a further paring could be on the horizon if earnings don’t start picking up.
It’s not as if the company doesn’t have any other pressing needs for cash either, as it has plans to invest around £1.8bn over the next five years in its UK operations. So maybe the dividend cash could be put to better use to help fund that and hopefully pave the way for more sustainable progressive dividends later?
While I do invest mainly for dividends, they should not be a company’s top priority. If I see a company offering me a big yield when I think it has better uses for the cash, I won’t buy the shares. For me to want to own a company, it must be putting its long-term health ahead of trying to butter me up in the short term with dividends it can’t afford.
Net debt stood at £300m at the halfway stage this year, which is lower than the adjusted pre-tax profit figure of £398m the company recorded just for the half, so at least shareholders don’t have a big debt problem to deal with. Royal Mail is not guilty of something I consider pretty much unforgivable – paying big dividends while shouldering big debt, which is effectively borrowing money to give to shareholders.
Royal Mail is struggling against newcomers in its business space, which in many cases are more agile and offer better services – with some I can track my parcels on an hourly basis, and even see the driver on a map.
If it pulls off any kind of decent turnaround, and its future isn’t wrecked by industrial action, Royal Mail might be worth buying. But right now I’m not biting – I always prefer to buy great companies at fair prices than struggling ones at rock-bottom prices.
Discover the name of a Top Income Share with a juicy 6% forecast dividend yield that has got our Motley Fool UK analyst champing at the bit!
Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”.
Click here to claim your copy of this special report now — free of charge!
Alan Oscroft 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.