Forget the Royal Mail share price, I’d go for this 8% dividend instead

The Royal Mail (LSE: RMG) share price has been in freefall, with 2018’s slide helping take it down 50% over five years. But is it set for a recovery?

My colleague Roland Head has pointed out that the company’s chief executive, Rico Back, has ploughed nearly a cool million of his own money into buying up Royal Mail shares, and that looks like a sign he’s expecting good progress.

But I have serious doubts about Royal Mail’s prospects for 2019, and I’m especially concerned for its dividend. With the share price down, it’s set to yield 8.8% for the year ended March 2019. While a big yield is generally a big attraction for me, it’s not so tempting when earnings are forecast to plummet and barely cover the predicted dividend — and that’s exactly what City analysts are expecting, with a 40% EPS slump indicated. 

Debt

Net debt is rising too, reaching £470m at the halfway stage, up from £382m a year ago. And while the shares are down, a forward P/E of 10.4 isn’t close to some of the rock-bottom bargains I see from other stocks. 

Back will, no doubt, be expecting a good return on his investment. But I’m convinced that his is a long-term outlook and that, with likely pressure on the dividend, Royal Mail shareholders could face more short-term hardships before things improve.

Whenever I search for big, but also reliable, dividends, I keep being drawn to Jupiter Fund Management (LSE: JUP). As I said in November, while I don’t like the idea of someone else managing my money for me, I’m perfectly happy buying into companies that are managing other people’s money.

Cyclical

Jupiter does seem to be doing it pretty well, even if it’s in a bit of a down cycle at the moment. With markets jittery, there’s been cash outflow from the sector as investors look for safe places for their cash.

I see that as a mistake. It seems obvious to me that when markets are down, that’s the time to be investing more rather than selling out. But that’s what happens, and it’s put downward pressure on Jupiter shares which have fallen — too far, in my view — by 53% over the past 12 months.

We’re now looking at an expected dividend yield of 8.6% for the year just ended on 31 December. And that would fall a little to 8.4% if the 12% retreat in EPS currently forecast for 2019 comes true.

Oversold

But we’re still looking at positive cover by earnings. And though I can see a fair chance that the dividend could decline a little further in 2020, I also see plenty of safety factor already in the current yield to make Jupiter shares an attractive investment. Even if the yields were to fall as low as 6%, I still think the shares on a 2019 P/E of 10.6 are undervalued.

I do see two tempting recovery targets here, on similar valuations and with similar dividend yields. But Royal Mail does need a new five-year strategy (which is set to be unveiled in March), while Jupiter Fund Management just needs to keep on doing the same thing. Jupiter is my pick of the two.