Quick Takeaways From Royal Mail PLC’s 2014 Results

Royal Mail Group’s (LSE: RMG) first set of annual results broadly met with forecasts — with one nasty surprise.

Operating profit increased by 12% to £671m as parcel delivery revenues rose 7%. Royal Mail’s parcel business overtook its letter service for the first time to become to main revenue contributor.

The parcel business is Royal Mail’s biggest growth area as the internet shopping boom continues. Other companies, however, are muscling in.

Increasing competition

royal mailMoya Greene, Royal Mail’s chief executive, noted that the group is “facing a couple of headwinds”. While parcel revenue improved, volumes were flat due to the introduction of size based pricing, which suppressed demand.

Direct delivery competition is growing. Royal Mail has called for intervention from the regulator, otherwise the group’s universal service obligations will become unsustainable.

As it is, Royal Mail fears it will be undercut on price by rivals which can cherry pick the most popular areas to deliver to. The impact of TNT Post UK’s intention to take its direct delivery services to additional cities could reduce Royal Mail’s revenue by over £200m in 2017-18.

Share performance

Shares in Royal Mail fell 5.5% to 544p during early trade this morning, up 65% on October’s listing price, and 14% short of the group’s 618p high.

As previously indicated, the Royal Mail board is recommending a final dividend of 13.3p, payable on 31 July 2014 to shareholders on the register on 4 July.

The board’s intention is to pursue a progressive dividend policy. After this morning’s price movement the shares yield 2.4%.

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Mark does not own shares in any company mentioned.