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The Royal Mail [RMG.LSE] share price is up 5% today after the company reported strong growth in half-year profits.
Royal Mail to return £400m to shareholders as profits beat guidance
Royal Mail Group today reported half-year revenue of just over £6bn, up 7.1% year-on-year, in line with expectations. Group adjusted operating profit came in at £404m, beating company guidance of £395m to £400m, while operating margin improved to 6.7%, up from 0.7% a year ago. The group’s profit before tax rose to £315m, up from £17m a year ago.
Royal Mail, the group’s largest division, saw revenue rise 6.4% to £4.07bn, driven by domestic parcel volumes. Another subidiary, GLS, saw revenue increase 7.5% to just over £2bn. Parcel volumes at both Royal Mail and GLS were up around a third on pre-pandemic levels, but at Royal Mail they were down 4% versus a year ago, while at GLS they rose 8% from the year-ago period.
With the improvement seen over the past year, the company announced plans to return £400m to shareholders, of which £200m will be in the form of a share buyback, with £200m in the form of a special dividend. This would be alongside the interim dividend of 6.7p per share, payable on 12 January 2022.
Royal Mail share price up on dividend news, but costs could rise
News of the buyback and dividend was welcomed by investors, helping lift the Royal Mail share price to 470p in early trading. The stock was trading at 462p shortly before midday Thursday, up more than 5% on Wednesday’s closing price.
Offering its full-year outlook, Royal Mail said it expects adjusted operating profit to come in at £500m, with operating margins expected to increase to 8%. However, the company warned that it could face upward pressure on costs, potentially impacting revenue growth in the second half of the year.
Operating costs remained a challenge in the six months to September, rising by £73m from a year ago, in keeping with the theme of rising costs that have been reported elsewhere, including at similar companies like FedEx in the US, which has increased wages for new hires.
Royal Mail management warned that the increase in national insurance contributions next year will add another £50m to its costs, while the introduction of a shorter working week for its staff could add £40m in the 2022/23 fiscal year. To offset these cost increases, the company said it has identified a further £190m in cost savings, through automation and other measures.
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