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Special dividend
Williams continued ‘we will return £400 million of cash to shareholders, partly through a share buyback and partly from a special dividend.’ Moreover, the group is returning this money as it believes that it can continue to grow based solely on current cash flow. And after a restructure, the group has saved £56 million in management costs.
And it continues to drive technological innovation and dispose of weaker legacy systems. Last Christmas, the service was unable to cope with the extra demand for parcel delivery while physical shops were kept locked down. This spurrred it to spend hundreds of millions of pounds on upgrades. This worried some investors, who were concerned about the high price tag. But now that the investment is paying off, it’s no wonder the Royal Mail share price is rising. And with the trend to online continuing, Royal Mail is likely to benefit from continually increasing demand for parcel deliveries.
However, Royal Mail does face challenges. The labour shortage is going to make it harder to hire seasonal workers during the crucial Christmas trading period. And with competitors like Amazon offering significant bonuses to new staff, it might find its wage bill beginning to inflate.
In addition, it has struggled in the past with balancing its commitment to universal delivery with profitability. Thompson said that ‘our strategy to rebalance our offering more towards parcels is the right one, and demonstrates the need to start defining what a sustainable Universal Service is for the future.’ It’s likely that agreeing this definition between shareholders, the government and Royal Mail’s board is going to be difficult.
In addition, it faces increasingly stiff competition in urban centres from the likes of Hermes, DPD, and Yodel who can operate with lower margins without being beholden to universal delivery.
Whether the Royal Mail share price continues to surge back to its valuation levels of 2018 is going to depend on it increasing parcel deliveries further. Having already spent the initial outlay, there could be more special dividends in the future. But its competition is likely to become fiercer as well.
