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Royal Mail’s (RMG) 49% price fall since the start of the year is an all-out delivery disaster compared to the FTSE 100, just 5% down. So is RMG, kicked out of the FTSE 100 earlier this year, now a buying opportunity?
We’ll know more on Wednesday when the 506-year-old group delivers a trading update but future share price optimism hangs on a pay deal with the unions – and it could be delayed.
It’s also messy. To ram home the point, RMG workers could strike the day RMG delivers its Wednesday numbers re-fresh.
For now a 5.5% pay bump, well below inflation, is on the sorting hall table. In return RMG wants more working flexibility to keep it competitive.
But like Royal Mail’s share price performance, they’re a mixed bag.
Rivals on the round
|
Royal Mail competitors |
Year-to-date share performance |
12-month share performance |
5-year share performance |
|
UPS (UPS) |
-16.5% |
-16.25% |
58.2% |
|
Deutsche Post (DPW) |
-35.5% |
-38.2% |
8.7% |
|
FedEx (FDX) |
-19.7% |
-28.3% |
-22% |
|
XPO Logistics (XPO) |
-36.7% |
3.6% |
66.6% |
There’s also French state-owned La Poste, Amazon Logistics and Yodel, privately owned by Frederick Barclay; Hermes is owned by private equity operator Advent.
To stir the T&C acrimony further, Royal Mail boss Simon Thompson has picked up a £142,000 short term bonus, pushing his pay and perks annual package to just over £750,000.
Not so sorted
The dilemma for shareholders is that Royal Mail is trying to do lots of things at once, from much more automation, crucial given the increasinglyi high-tech competition, to trimming the workforce and generally shrinking the cost base.
“Back in 2018-19 just 12% of parcels were sorted automatically,” said Hargreaves Lansdown analyst Susannah Streeter in May.
It’s currently around the 50% mark despite a huge uplift in parcel volumes, and the group has ambitions of hitting 90% in the not too distant future.
Margins pre-paid pressure
Automated parcel sorting, she adds “improves quality and provides the extra flex needed to deal with peaks and troughs in demand”.
Other costs, like fuel, are surging, all hitting margins. RMG says it may hit adjusted operating profits of £303m if it reaches a pay deal and heads off a strike compared to £311m last year.
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However £400m has already been generously returned to shareholders via special dividends and a share buyback.
- Royal Mail divides into two arms, Royal Mail and General Logistics Systems (GLS).
- Royal Mail offers a one-price-for-anywhere service for letters and parcels to more than 31m UK addresses six days a week.
- There’s also Royal Mail business sorting and delivering letters and parcels.
Second class dividends?
Royal Mail has had to slash its dividend in the past and RMG isn’t a reliable ‘divi’ grower in the style of dividend giants like BAT, Diageo or Legal & General. Its return on capital is too patchy.
Yet Royal Mail’s revenues remain around £12.7bn and its current dividend yield, around 7.7% on current prices, could rise still.
European transport analyst Alexia Dogani at Barclays says Barclays UK Consumer Survey suggests e-commerce penetration will remain at higher levels vs. pre-pandemic.
But near term “we expect increasing macro pressures, driven by cost inflation, to put further pressure on revenue outturn [actual revenues] for UK Royal Mail”.
