Royal Mail PLC dividend under threat again, warns Berenberg

() was downgraded by Berenberg as the tough times of the postal industry are not expected to improve soon and could results in another dividend cut.

Research by the bank indicated the parcel industry outlook is “broadly positive” as volume and pricing momentum are expected to remain steady in 2020. 

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Letter volume declines, however, “continue remorselessly”, which is likely to be confirmed in Thursday’s trading statement.  

Moreover, sector’s returns on capital keep falling as parcel growth dilutes profit margin and is more capital-intensive. 

Royal Mail was downgraded to ‘sell’ from ‘hold’ by Berenberg’s analysts as they slashed their target price for the shares to 150p from 240p as they think it is “in a difficult position to deal with these trends”. 

Explaining more, the analysts added that Royal Mail’s five-year profit turnaround plan “requires both a slowdown in letter volume declines in the UK and a step-change in operational productivity”. 

An improvement in the level of declines in snail mail volumes “is unlikely given the still-high mail base in the UK and worsening momentum”.

Furthermore, a major improvement in operational productivity “may be either hamstrung by employee unions or offset by wage inflation”, so the analysts suggest productivity improvements of the scale it needs “might be achievable only with more wage increases”.

They added that if the turnaround cannot be achieved on time, the already re-based dividend might be called into question.