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I’m struggling to see how postal service provider Royal Mail (LSE: RMG) can deliver for shareholders in the foreseeable future.
As my Foolish colleague Alan Oscroft reported a few days ago, CEO Rico Back’s plan for transforming the business is progressing slower than expected. In the meantime, letter volumes continue to fall and the threat of industrial action is never far away.
All this before we’ve even considered the nightmare scenario for its owners of Jeremy Corbyn taking the company back into public hands (and likely paying a less-than-optimal price to existing holders in doing so).
Taken collectively, the above makes me even more concerned for the future of Royal Mail’s dividend than I already was. Despite the substantial trimming of payouts earlier this year, the shares still yield 7.1%, based on a likely 15p per share cash return.
Considering the existing debt on its balance sheet (roughly two-thirds of Royal Mail’s entire market-cap), that still looks excessive. Analysts expect Royal Mail’s dividends to fall again in FY21, by roughly 4%, but I wouldn’t rule out another, far-more-substantial cut.
Based on its closing price yesterday, the shares trade on a forecast price-to-earnings (P/E) ratio of just 9. That may get contrarians interested, but I simply can’t be tempted when there are so many other better opportunities for generating income elsewhere in the FTSE 250 index.
Dividend grower
For me, a company like drinks giant Britvic (LSE: BVIC) will always be a more appealing investment. That’s despite today’s full-year results revealing a whopping 30.9% drop in post-tax profit, partly due to the write down of manufacturing sites in France and problematic trading in the country following the introduction of a law that increased prices on branded products.
It wasn’t all doom and gloom though. Revenue increased 1.4% to £1.55bn with the owner of brands such as Robinsons, J2O and Tango (and distributor for PepsiCo) reporting a good performance in Britain, despite strong comparatives following last year’s boiling-hot summer. The company also highlighted that it had now achieved “six consecutive quarters of revenue growth in Brazil.“
In other news, the firm said it had seen “significant improvement” in adjusted free cash flow (up £51m to £116m) and that, following the completion of its Business Capability Programme, cost savings had been delivered earlier than expected. Reflecting on today’s results, CEO Simon Litherland said the company expects to make further progress in the new financial year, even if market conditions are likely to “remain challenging.”
For me, however, Britvic is all about the dividends. As a result of earnings per share increasing, the £2.6bn-cap reported today it would hike the final dividend 6.9% to 21.7p per share.
This gives a total payout of 30p per share for FY19 or, using today’s share price, a trailing yield of 3%. That may be far less than the proposed cash returns from Royal Mail, but I’d rather have reasonable and rising dividends than already-excessive and falling.
Furthermore (and in contrast to Royal Mail), analysts have predicted the total payout from Britvic will rise again in the new financial year to 31.3p per share. Profits should also be sufficient to cover this amount almost twice over, thereby giving holders a decent amount of security relative to other income stalwarts.
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He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.
With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
