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Picture your average pandemic winner, and it probably doesn’t look much like Royal Mail. The last 12 months have rewarded companies that were able to adapt to shifting consumer demands and punished those that weren’t.
Perhaps Royal Mail doesn’t scream “innovation”. Yet here stands a clear pandemic winner, one which has rewarded its investors with a sharply rising stock price since last March and now a one-off final dividend, announced in today’s full-year results.
The company was one of many forced to suspend its dividend last year as COVID struck. Today’s 10p payment is small by historical standards, but it’s a gesture of intent that’s been well received on the stock market. The company has seen its stock price rise more than 2% this morning.
The surprise dividend payment reflects what’s been a fruitful period for the once state-owned service. Over the last 12 months, the Royal Mail share price has soared.
Recent earnings reports concur with investors’ excitement. The company expects adjusted operating profit to rise to about £700 million over the 12 months to March, more than double the £325 million over the same period a year ago.
Royal Mail has benefitted from people relying on delivery services over lockdowns. Surprisingly, that’s true of its letter business - letter volumes have proved broadly resilient, especially since its ‘busiest ever’ Christmas - but mostly it’s true for parcel deliveries.
The company recently reported that parcel revenue was greater than letter revenue for the first time. Given the typical makeup of many households’ daily deliveries, this won’t surprise. The rise of parcel delivery has been a long-term trend, and 2020 did much to accelerate it.
This hasn’t necessarily been good news for Royal Mail. If anything, it’s been a worrying trend for a company that has struggled to shift the weight of its legacy business focussed on sorting and distributing letters to meet surging demand for parcels.
Even before 2020, it had concerned investors. Set Royal Mail’s beaming one-year stock price graph to a five-year one, and things look far more erratic. A 630p peak in May 2018 slumps rapidly to a 124p trough in April 2020, before steamrolling upwards to today’s 520p.
And, despite its successes this year, the company has shown frailties over the pandemic. Reports of backlogging parcels suggested the bumper Christmas came a little too early for Royal Mail.
Recent measures have helped meet parcel demand. A recently introduced Sunday parcel delivery across the UK is a good idea, but there will be doubts over how lasting the parcel boom is. While online retail shopping looks well-entrenched, habits will change again once lockdowns lift.
Keeping abreast with industry changes and investing in supporting technology will be vital for the company moving forward.
It’s good to see then that Royal Mail has invested sensibly in its parcel infrastructure. Last year, the company agreed to build two new fully automated hubs in the UK. The hubs are expected to be completed by 2022 and 2023 respectively. The largest will able to process over one million mail items a day.
The company is also feeling the benefits of its international business, GLS. It’s the fastest growing part of the business, and Royal Mail sees opportunity for much greater growth moving forward. GLS is targeting 12% annual revenue growth over the next five years and intends to more than double operating profit to €500 million.
Long-term planning of this sort comes at a good time. It builds on what has been something of a U-turn year for the company. It acknowledges where the industry is heading and suggests sensible steps to keep ahead of it. These remain early days for a changing strategy, but Royal Mail looks to be shrugging off its legacy shackles and embracing the future.
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Five year performance
(%) As at 29 March
Past performance is not a reliable indicator of future returns
Source: FE, total returns with net income reinvested in GBP terms
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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