Royal Mail Set To Yield Up To 7.7%

This morning, Business Secretary Vince Cable announced the expected price range of Royal Mail’s initial public offering, which is set at 260p to 330p. This values the UK postal service’s market cap at between £2.6bn and £3.3bn when it lists on the stock exchange next month, expected on 11 October.

The government is selling off between 401 million and 522 million shares in the offer (40.1%-52.2%), with 10% of the shares handed free to c.150,000 eligible UK-based Royal Mail employees in what’s the largest share giveaway by any major UK privatisation; however, the government is still expected to raise around £2bn.

Private investors looking to get in at the beginning will have to pay a minimum investment of £750, with applications open until 8 October, and income investors are expected to be interested in particular — today’s statement confirmed an implied dividend yield of around 6.1% to upwards of 7.7%, going by the aforementioned price range and the planned FY 2014 dividend payout of £200m.

Commenting on the news, Vince Cable said:

“This will give Royal Mail access to the private capital it needs to modernise, as envisaged under successive governments, and enshrined in law by Parliament two years ago.”

That yield will tempt many, but it’s worth being aware that there are talks of strikes by postal workers over the privatisation, as well as salary and pension changes. This may temper investment, with these strikes hardly being an isolated event.

Much of the buzz surrounding the IPO suggests that there will be a huge demand for Royal Mail shares initially — but concerns remain over its long-term value, with strikes and competition in the sector carrying threat. But what are you thinking? Let us know in the comments box below!

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> Sam does not own shares in any company mentioned.