Should I buy Royal Mail shares after its profits surge?

Royal Mail (LSE: RMG) shares are in the limelight again, but this time because the company has reported its full-year results. And let me say straight up, the numbers were impressive.

Both revenue and profits have surged. But have I missed the boat with Royal Mail shares? I don’t think so. I think the company has now turned a corner after years of legacy problems.

As I mentioned, the results for the 2020/21 financial year were fantastic. So I it’s worth taking a closer look.

The numbers

I believe the figures can be summed up by the statement made by CEO Simon Thompson: “We’re changing. And it’s working”. I agree.

Revenue increased by 16.6% to £12.6bn. The company expected to deliver this level of sales by 2023/24, so I’m pleased that it has met this target ahead of schedule. Adjusted operating profit grew by a staggering 116% to £702m.

I’m not surprised that parcels now account for 72% of revenue. The pandemic has only acted as a catalyst for a trend that most investors guessed had been coming for years. This means that parcel sales now exceed letters and this is expected to continue.

Even net debt fell significantly from £1.1bn to £457m. This big drop highlights that last year was a transformational one for the firm and for Royal Mail shares. Its financial position has drastically improved, which places the company in a better place going forwards.

Dividend

I’ve previously covered Royal Mail shares when it announced that it was paying a one-off dividend of 10p. But the firm has now provided further clarity on its ongoing income payments.

The company highlighted its sustainable progressive dividend policy. So what does this mean? Well, for the 2021/22 financial year, it expects to pay a total of 20p per share. This will be paid in various tranches across the period.

Royal Mail also provided further clarity by saying that “from 2022/23 the interim dividend will be one-third of the prior year’s full-year dividend”.

Of course, there’s no guarantee that the company will pay this income. But what it highlights to me is that it’s confident about the transformation and the future.

GLS

I’ve said this before but the GLS division is the company’s gem. It’s been growing phenomenally and I reckon this will continue. This unit accounted for over 30% of Royal Mail’s 2020/21 revenue and that’s growth of 28% from the previous year. 

It’s encouraging to see that the company still expects GLS to meet the guidance set out earlier this year. As a reminder, Royal expects this division to generate an operating profit of €500m in 2024/25 and €1bn cumulative free cash flow over the next five years.

Outlook

While things may be looking good for Royal Mail shares, there are still risks involved. Management remains concerned about the future and gave little guidance. It said that “significant uncertainties with respect to public health and economic growth cloud the outlook for the year ahead”.

The pandemic has resulted in more people ordering online. But I worry whether the company can sustain this level of growth in revenue and profits once Covid-19 is over. If not, the stock price is likely to be hit.

But for now, I think it’s taking the right steps. Hence I’d buy Royal Mail’s shares today.