Is a FTSE 100 Return Poised for IDS Shares?

Do IDS shares face a difficult route back to the FTSE 100?

One positive development for IDS shares is the recent end to strike action that had plagued the logistics giant for months. Royal Mail staff voted in favour of a deal for a 10% pay rise over three years and a one-off lump sum of £500. The industrial dispute’s resolution arguably removes a key obstacle to the business’ route back to the FTSE 100. Nonetheless, it may also exacerbate fundamental flaws in the business model.

As a result of the pay deal, IDS expects Royal Mail’s annual wage costs to balloon by £350m. Considering the division is already loss-making, the division can ill afford a spiralling staff budget. That said, last year’s 18 days of strike action cost the company £200m. As such, the FTSE 250 stalwart is stuck between a rock and a hard place when it comes to increased staff costs.

Regulation is another issue IDS has to grapple with. Ofcom imposes a universal service obligation on Royal Mail. In essence, it has to deliver letters to every UK address, six days a week, at a uniform price. IDS has lobbied for the removal of this obligation, asserting it is financially unsustainable. But unfortunately, the government has so far rejected these requests. This puts a FTSE 100 return further out of reach for now.

Nevertheless, the former FTSE 100 mainstay is making good progress in some areas. A 10k headcount reduction in Royal Mail should help to offset some of the increased costs from the new pay deal. In addition, the positive trajectory of GLS should be commended — this arm of the business is likely to be an asset for future growth in the IDS share price despite Royal Mail’s struggles.

IDS shares have a long way to go before they grace the FTSE 100 again. Progress is underway, but the conglomerate needs to be firing on all cylinders for a sustained share price recovery to materialise. So, until Royal Mail turns a profit again, this looks like a distant prospect. IDS shares have a consensus price target of £2.70, indicating a c.13% upside.