Royal Mail shares ‘priced to go’; high yield expected

Royal Mail’s privatisation hit its stride today as the government published a prospectus for the £3.3 billion share offer.

The government launched the flotation two weeks ago. It is clearly aiming the flotation at income investors saying today that the shares would pay an annual income, or yield, of between 6.1% and 7.7%. This dwarfs the average yield on the UK stock market which is currently 3.7%.

Dividend yields fluctuate according to the level of the share price and the government’s calculation is based on the shares being priced at somewhere between 260p and 330p. It also assumes a £200 million dividend payment to shareholders.

A yield at this level would make Royal Mail one of the highest yielding shares in the FTSE All Share: at 7.7% it would rank fifth out of 617 stocks on the London Stock Exchange, according to Thomson Reuters data.

Royal Mail says it would aim to gradually increase the dividend every year. This is not something all high yielding companies can do. A high yield is often associated with a low share price and a company that is out of sorts.

Arguably, investors need the income as an incentive as Royal Mail is not a happy or trouble-free institution. The company has confirmed that unions opposed to the privatisation will launch a national strike on 23 October, less than a fortnight after Royal Mail joins the stock market.

However, a more positive view is ‘that it’s priced to go’, as one analyst told Reuters.

The timetable for the sell-off is tight. Investors have until 8 October to apply for the shares through the retail offer. They can apply either through a stock broker or directly through the royalmailshares website. The minimum investment is £750.

The government is selling between 40% and 52% of Royal Mail’s shares in an initial public offer (IPO) valuing the business between £2.6 billion and £3.3 billion. The prospectus, which all investors are encouraged to read, makes clear the scale of the transformation the company is going through but also its sensitivity to the state of the economy.