There are so many depressed stocks these days that look, on the face of it, like good recovery investments that I’m finding it hard to resist temptation almost on a daily basis. Could Royal Mail (LSE: RMG) be one of them?
The shares were holding their own, and even spiked up in early 2018. But since a peak in May that year, shareholders have suffered a 65% loss in the value of their holdings.
It’s a major FTSE 250 company, with a forecast dividend yield of 7.2% and its shares are languishing on a prospective P/E of only 9.6, and that’s often the kind of valuation that suggests an oversold stock that’s set to bounce back. But the problems at Royal Mail run deeper than that.
Price slide
The share price decline kicked off at results time in May 2018, when the mail behemoth told us that the predicted decline in letter volumes, though in line with expectations for that year, was expected to come in at the higher end of the forecast range for 2018-19. Still, parcel volumes were growing, and the company said at the time that it remained committed to its progressive dividend policy.
But we had a profit warning in October, though this time Royal Mail added that its “strong balance sheet and long-term cash generation characteristics support commitment to progressive dividend policy,” so no worries there then. And the company was still sticking to its guns at the halfway stage, again banging on about its progressive dividends in November.
Dividend slashed
But guess what? In a huge about-face, when full-year results were released in May 2019, we got: “We are rebasing the dividend and changing our dividend policy.” That rebasing meant a 40% cut, with the dividend set to drop to 15p per share in the coming year.
Now, the dividend cut was clearly needed, with EPS falling 33% for the year. And apparently it “may be supplemented by additional payouts in years with substantial excess cashflow.” But a forecast for a further 23% fall in EPS for 2019-20 really doesn’t make me think we’re likely to see such a year any time soon.
It doesn’t exactly fill me with confidence in Royal Mail’s management either, and I can see things only one of two ways. Either the board was genuinely so clueless about the state of the business as recently as November 2018 that it really saw no reason at all to suspect its progressive dividend was about to go off the rails. Or, maybe they just thought it better to not worry shareholders about their precious dividends until things were certain.
Not for me
So, cluelessness or inadequate transparency, I really don’t know. But either way, I invest mainly for dividends, and when the managers of one of my companies tell me the dividend is reliable I need to be able to trust them — and not find out the exact opposite of what they’re telling me just six months later.
The market’s lack of confidence in Royal Mail is apparent from the continuing share price slide, and I can’t see it returning any time soon unless something drastic happens. I’m keeping a good bargepole’s distance.