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Royal Mail's dividend yield may disappoint some investors, analyst suggests

Royal Mail's results showed "a series of small disappointments that mean they’re not quite the full package", according to Hargreaves Lansdown's Nicholas Hyett.
Royal Mail
UK letter volumes fell as much as parcel volumes rose in fiscal year 2017/18

Royal Mail PLC (LON:RMG) raised its dividend by 4% to 24p after a mixed set of full year results.

Outgoing chief executive, Moya Greene, also said the group’s “good cash generation” will “support our progressive dividend policy” after swinging to net cash of £14mln in the year from net debt of £338mln last year.

But a dividend yield of 4% may leave some investors disappointed.

“The dividend rises again, but a yield of 4% is only just in line with the wider stock market, and you’d really be hoping for more from a mature cash generative business like Royal Mail,” Nicholas Hyett, equity analyst at Hargreaves Lansdown, said.

Hyett added that the group's results showed “a series of small disappointments that mean they’re not quite the full package”.

In the year ended March 25, 2018, the postal operator reported a 36% drop in pre-tax profit to £212mln and a 2% increase in revenue to £10.1bn.

READ: Royal Mail's profits drop on pension charge, revenues rise on growth in parcels

The results more or less told the same old story with growth in parcel volumes in the UK and the Global Logistics Systems (GLS) businesses mitigating a decline in letter volumes.

For the next fiscal year, letter volumes are expected to reach the top end of its guidance range for a drop of between 4-6% due to the estimated impact of the introduction of General Data Protection Regulation (GDPR) in May.

“There are bright spots of course – GLS continues to perform well and UK parcel volumes are picking up – but all in all these aren’t results to really move the needle,” Hyett said.

Investors take profits after share price gains

A 51% increase in the share price over the past six months propelled the company back into the FTSE 100 index in March. Over the last 12 months, the shares are up 40% compared to a 2.8% gain for the wider FTSE 100.

But shares were down 5.12% to 567p in Thursday morning trading as investors seemed to take profits given the company’s mixed outlook.

Challenges in UK parcels

The group has acknowledged that it continues to face tough competition in the UK parcels business from the likes of Deutsche Post and Inc (NASDAQ:AMZN).

Competition is not the only challenge facing the UK business, according to David Madden, market analyst at CMC Markets.

“The British division has always lagged behind its continental counterpart because it must deliver to all parts of the UK, no matter how remote,” he said.

Royal Mail needs to keep down costs, says analyst

Madden added that Royal Mail operates in a “low margin industry, and keeping costs down is crucial”.

Royal Mail is targeting £230mln in cost savings in the UK business in the year ahead but restructuring costs are predicted to be at upper end of the forecast range of £130-150mln.

“Investors will be keeping an eye on the bottom line in the year ahead,” Madden said.

However, the analyst believes the “consistent dividend policy throughout the year suggests the business is stable, and will reassure investors”.   

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