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Royal Mail: trouble in the post

Ed Monk

Ed Monk - Fidelity Personal Investing

Spare a thought this morning for investors in Royal Mail, who have just been told dividends from their shares will be cut in the years ahead following an eight month period in which the price has fallen around 56%.

Royal Mail: trouble in the post

And bear in mind especially those Royal Mail staff who received shares in the company when it was listed on the stock exchange in 2013. They were given shares on the condition they would not sell them before October 2018, so will have been dismayed when Royal Mail issued a profit warning just three weeks before the lock-in period ended, sending the price spiralling.

For these staff, it may well be that their Royal Mail shares are the bulk of their invested savings, leaving them very exposed to the fortunes of the company - which they also happen to depend on for their income and pension as well. It’s a tough lesson in diversification.

As its results showed today, there is good reason to be concerned about the postal service provider. It now forecasts making an operating profit of between £300m-£340m in 2019-20, down from £411m last year.

But it is less the lower profits now that seems to be worrying the market, but the fact that Royal Mail faces a disintegration of its traditional business model. Email has destroyed much of the demand for old-fashioned post, of course, but it is nothing new. Royal Mail has still been able to rely on the mountains of business mail sent every day to help see it through as it transitions to more sustainable profit lines, such as parcels which are growing healthily thanks to rising internet shopping sales.

But even business mail now looks far less secure following GDPR - General Data Protection Regulation - which means businesses have tougher rules to comply to when they contact customers for marketing purposes. Many firms took the introduction of new rules last year as an opportunity to revamp their email marketing permissions and leave more expensive snail mail in the past.

Royal Mail has promised to invest £1.8bn in the UK postal service and has said it will introduce 1,400 parcel postboxes across the UK, in the single biggest repurposing of the postbox network for over 160 years. The company said it aims to earn 40% of revenue from its operations outside Britain and 70% from parcel deliveries by the end of the five-year period.

It is that investment that has made it necessary to trim the dividend, which will fall in 2019-20 to 15p from 25p now. In point of fact, the market reacted well to that news and Royal Mail shares rose from their lows today - probably reflecting relief that management appears to be under no illusions about what’s necessary to improve performance.

That probably won’t stop criticisms from Jeremy Corbyn and the Labour Party, which has said it would consider renationalising Royal Mail. Labour has been bullish about its ability to take control of former utilities and pay shareholders far below the market rate, should it win power. If that were to happen, it’s an open question as to whether the turnaround plans currently being enacted would survive and a state-owned Royal Mail could be scaled back to concentrate purely on its obligation of providing a universal postal service that guarantees deliveries to every UK address.  

More on Royal Mail

Five year performance

As at 21 May
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Royal Mail -9.2 2.7 -8.9 37.1 -59.6

Past performance is not a reliable indicator of future returns

Source: FE, as at 21.5.19, in GBP terms with income reinvested 

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