Shares in Royal Mail (LSE: RMG) have lost more than half their value over five years, with most of the damage happening in the past 12 months.
On the upside, dividends have remained strong and progressive, rising from 21p per share in 2015 to 24p last year — with the 2018 yield reaching 4.5%. But those payments are looking increasingly like they were excessive, and could have contributed to the downfall.
One problem I see as serious is Royal Mail’s burgeoning net debt, which stood at £470m at the halfway stage at 23 September, and that was up 23% from the figure of £382m a year previously.
That was two-and-a-half-times the company’s operating profit for the half, and that’s before accounting for transformation costs. Once those costs are taken into account, we’re looking at net debt of three times first-half operating profit.
Debt
Annualising it, that net debt figure might look reasonable to some when compared to likely full-year earnings, but I’d dispute that on two counts. One is that, while similar debt levels might not provide too much of a problem for well-run companies in the prime of health, Royal Mail is far from being such a company.
Royal Mail is struggling to reform itself, and that costs money, so I reckon it should be working hard on its balance sheet.
That brings me to my second thing — I reckon paying out big dividends when a company is in this situation is madness. To me it almost looks like a bit of “Hey, we’re still paying dividends, so we must be OK” bravado.
Royal Mail shares are currently trading on P/E multiples of around nine, with earnings expected to be slashed by 40% this year. But I want to see a lot more positive development before I put my bargepole away.
Woes
Marks & Spencer (LSE: MKS) has been a perennial under-performer for as long as I can remember. Whenever I open an update from M&S, I expect to read about ongoing struggles with its non-foods offerings, and I’m never disappointed.
The firm’s big problem is that it’s just no good at fashion and never has been. The city centre M&S nearest me is directly opposite branches of Primark and Next, and both of those are cleaning up in their target market segments while M&S still doesn’t seem to know what its segment is.
But the penny might finally be dropping for the high street giant, as its recent tie-up with Ocado confirms the company’s increasing focus on what it does best.
Food
The rise of M&S Simply Food outlets is positive. The nearest to me is on a site shared with a branch of Aldi, and I think the two complement each other nicely — and they’re both always busy when I visit.
On the valuation front, we’re looking at P/E multiples of a little over 11. Big forecast dividend yields of around 6% might make that look good, but we’ve already had two years of falling earnings and there are two more on the cards. I see pressure on the dividend.
Full-year results are due on 22 May, and I’ll be looking for further progress in M&S’s new focus on its strengths. But until I see it translating to bottom-line improvements, I’m still avoiding.