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Royal Mail’s latest results will be eyed closely next week for evidence that the company’s further transition to a parcel delivery service is running smoothly and that a progressive dividend policy remains on track.
Royal Mail reinstated its dividend back in March, with a surprise 10p final payment, and its shares returned to the FTSE 100 in June. The stock’s spectacular fourfold increase since hitting a low of around £1.24 last April reflects a similarly impressive rise in pre-tax profits in the year to March, but will the good news keep on coming as the pandemic fades?
Parcels overtook letters for the first time in 2020-21 as Royal Mail’s main source of revenue. Plans to bring a second fully automated hub into operation by 2023 with a capacity of one million parcels per day demonstrate the business is committed to adapting to a longer term shift in the way that consumers shop.
Royal Mail has won contracts from the NHS and Birmingham City Council for Covid test kit deliveries so far in 2021, and more could follow as cases of the Delta variant continue to rise. However, this demand will tail off in time, as could the short-term demand from consumers for parcels as bricks and mortar purchases recover.
Royal Mail’s European parcels business, GLS, still looks set to deliver some premium growth going forward. GLS is targeting annual revenue growth of 12% over the next five years and aiming to more than double its operating profit to €500 million.
Royal Mail is probably not the number-one stock you would buy for an exposure to the economic recovery, despite it now being recognised as an established link in the e-commerce chain. It faces stiff competition from its rivals as well as consumers returning to the high street this summer.
The shares have drifted since late May, presumably as investors wait to find out more about how the company is faring as consumers get back to work and get out to the shops. However, it still has about half of the UK parcels business, which should prove a valuable asset as the long term trend to online purchases takes over from where the pandemic left off.
Royal Mail shares yield 3.5% based on the company’s intended dividend of 20 pence for 2021/22 and trade on an undemanding multiple of just over 9 times last year’s earnings1.
Environmental, social and governance (ESG) factors
Postal deliveries mean fewer consumer car journeys and remain an invaluable source of human contact for people unable to fully engage with the outside world. Post offices play an important role in smaller communities.
Future deliveries by drone – currently being trialled in the Scilly Isles – could further reduce Royal Mail’s carbon footprint. The company says it already has the lowest reported CO₂ emissions per parcel of any major deliveries company in the UK.
Returns owing to the delivery of damaged or unsuitable products increase the number of goods destined for landfill or incineration thereby adding more CO₂ to the atmosphere – an innate problem for the e-commerce industry in general.
Look out for an update from Royal Mail on Wednesday.
More on Royal Mail
1 Bloomberg, 13.07.21
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