Postal services firm Royal Mail Group (LSE: RMG) has just released its full year results today, and the picture is mixed.
This is a once staid and uneventful company that is now undergoing rapid change. Email, online shopping and similar innovations have had a huge impact on Royal Mail’s business. I hardly ever send letters these days, as emails are far easier, quicker and cheaper. But I frequently use the parcel service for online shopping.
The picture is mixed
The firm’s full year profits fell 33% to £267m, as it took a substantial hit from transformation costs. Yet, seen in the round, the company does not seem to be losing business. Revenues actually rose by 1% to £9.2bn. And the company’s preferred measure of performance — adjusted annual operating profits before transformation costs — rose 5% to £742m.
What’s more, the business has raised its dividend, as it positions itself as a slow-growing, high-yielding blue chip for income investors.
Dig deeper into the numbers and we see that there have been 3,500 voluntary redundancies, costing the firm £117m. There is a steady transition away from letters, which are gradually being replaced by emails, and towards parcels, as the business continues to garner sales from Internet retailers like Amazon. Over the past year, letter volumes fell by 3%, while parcel volumes increased by 3%.
UK revenues fell by 1%, but a key source of growth has been its European General Logistics Systems division, which grew volumes by 10% and revenues by 9%. I think expansion overseas will be the main way Royal Mail will be able to grow its profits.
Many merits as an income investment
Overall, I see a company in a steady state, that is consistently profitable, and that is maintaining its sales, with a generous dividend yield. It is edging down its staff numbers, and edging up letter and parcel prices, so that its margins and earning power are maintained. And the fundamentals look cheap. The 2016 P/E ratio is just 12.67, with a dividend yield of 4.34%.
Now, that is not the highest dividend yield you will find. But it’s the long-term consistency that makes this stock attractive.
When Royal Mail launched its public offering in 2013 I, like many canny investors, eagerly jumped on board, and sold a few months later after making a tidy profit. After the initial bout of institutional buying, and as the excitement of the offering has faded, so the share price has tumbled. There was much debate at the time about the share sale being set at too low a price. But, with hindsight, it was about right.
Many of the IPO investors may have forgotten about this company, yet the fundamental appeal of this share remains. Thus I think this is still has many merits as an income investment, and is worth tucking away in your high yield portfolio.