What I make of the falling Royal Mail and SSE share prices

Shares in postal operator Royal Mail (LSE: RMG) have come under further pressure recently after a negative note from JPMorgan Cazenove. The investment bank said that there is “potential for material near-term volatility and uncertainty” regardless of the outcome of the company’s dispute with the Communication Workers Union (CWU).

A myriad of problems has pushed the share price in Royal Mail down by 18% this year. Over five years the picture is even worse, with the shares nearly halving in value.

Problems with its unionised workforce – a legacy of government ownership before it floated – are hardly new for Royal Mail. However, it’s an issue that’s never really been satisfactorily resolved, as recent events show, with the union serving notice for a strike ballot among 110,000 workers. This has to be a concern for investors. The question has to be asked: will relations with employees always act as a drag on the share price? 

In 2017, strike action was only averted because of external mediation between the postal operator and the main union of its huge UK workforce – comprising some 145,000 employees.

Other problems

The company has had to slash its dividend to fund its turnaround strategy. The dividend was cut by 40% back in May this year. For 2019/20, it intends to pay a full-year dividend of 15p a share. That compares with the 25p-a-share payout for the 2018/19 financial year.

Investors have a right to mistrust management, because before the cut, the chairman at the time had reassured them the board was committed to a progressive dividend policy. For most this would mean a rising dividend, not one that was later chopped heavily.

One issue that is outside the control of management, but is likely to act as a brake on the share price, is the prospect of re-nationalisation under a Jeremy Corbyn-led government. Given the heavily unionised workforce and its previous public ownership – as recently as 2013 – Royal Mail would be firmly in the sights of any Labour government that forms under his leadership. I would avoid it for now.

A better alternative?

For any investor looking for a better high-income turnaround opportunity that stands, in my opinion, more chance of rising in value, I’d suggest looking at energy company SSE (LSE: SSE). It’s about to complete the sale of its consumer arm to Ovo for £500m. This cash is much needed, I think, to pay down debt and focus the business on renewables. An area where it’s investing heavily. 

What’s left at SSE is heavily regulated. It should be easier to manage the smaller, more focused business and that in turn could lead to cost savings and better profitability.

Like Royal Mail, the energy company also cut its dividend. There are also challenges around possible nationalisation, rising interest rates and the reliability of renewables. But on the other hand, there are opportunities from developing technologies to support electric cars, to name just one example. 

SSE is possibly a better investment than Royal Mail, but it may be best to wait until the results of offloading the consumer division become clearer, and that may take a while.

Royal Mail and SSE both have very high dividend yields, but I believe this reflects the fact that both face uncertain futures.