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The Royal Mail (OTCPK:ROYMY, OTCPK:ROYMF) is the United Kingdom’s premier courier, and like times past, it will endure despite the circumstances. The recent coronavirus shock has pushed the company’s shares to an all-time low, and its dividend yield above 10%. The company is undergoing a transformation to focus more on package delivery, which could prove profitable if it succeeds. There are several troubles for the company, but if the next few months are survived, the future could be bright for this company.
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Coronavirus
The company continues to provide service during the pandemic. With millions staying home, their parcel delivery business could receive a boost. Their digital modernization project may also be expedited by people staying home. As mentioned on their recent conference call, they had just under 1 million downloads of their app. I expect much higher numbers now. Their rollout of new postal boxes and their adoption may be slowed, as well as a larger revenue downside if the overall economy is hit for a longer period.
Union Negotiations
I would first like to commend the Communications Workers Union (CWU) members for continuing to deliver packages as a service to those who can’t leave their homes, and for offering to act as a broader emergency service for the country. The union did, however, vote overwhelmingly for a strike. This is due to disputes between workers and management over the future of the company, as well as pay and working conditions.
I don’t believe their two views are unreconcilable and a deal can be reached. The union is concerned with plans to “turn the Royal Mail into just another glorified parcels carrier.” This is a fair criticism, and the union is right to point out the Royal Mail’s “unrivalled infrastructure.” It is important to improve the parcel business in order to maintain profitability, but job cuts and loss of other services don’t need to go along with it. The Royal mail, considered the preferred parcel carrier over 50% of people in one survey, has many other strengths that should continue to be leveraged, and the union negotiations should help shape this discussion. There may be minimal short-term impacts due to strikes, but in the long term having a clear plan going forward with the workers’ support is the best path.
Modernization And Parcel Boxes
The Royal Mail is investing 1.8 billion pounds to improve its service and increase its parcel capacity. With a decline in letter revenue, management is working to offset the loss with gains in parcel delivery. As a part of this, they have begun to roll out parcel boxes across the UK. These boxes should make sending packages easier and increase volume for the Royal Mail. As mentioned above, a new app integrated shipping through the Royal Mail onto your phone. They’re also working to automate letter and parcel sorting, which proved successful thus far but proved contentious with the CWU. In the long term, these efforts should help the company and improve service.
The company also has opportunities to expand internationally, through GLS in Europe and Diacom in Canada. These businesses continue to outperform the UK postal service and will benefit from modernization.
Valuation And Dividend
The company’s shares recently touched all-time lows due to coronavirus fears. Their trailing P/E is 4.66, far lower than their five-year average P/E of 18.01. A result of this low valuation is, despite a dividend cut, a high dividend yield of just over 10% per year. The company cut its dividend to 15p per share, from 25p per share – or in dollars, to the equivalent of 36 cents annually per ROYMY share. This was a welcome development to many shareholders as the cut is to fund the company’s modernization. This yield is one of the highest in the world for any delivery company. With the dividend having already been cut to fund this expansion, it looks relatively safe in today’s tumultuous environment.
The company’s debt is much lower than in the past when it ballooned to over 2 billion dollars. They have taken on more than 1 billion in capital leases, bringing their net debt way up. This should be manageable, but I would watch for more information at the next update on May 21. With interest rates falling, the company may take on more debt to fund their plans – something asked about on the last call and ignored by management.
Conclusion
The company clearly has challenges for the near future, but as it has for its 500+ years of operation, the Royal Mail will endure. I believe in the ability of the union and management to reach a deal and find a path forward that benefits all. The company’s present low valuation is attractive – especially with the high dividend yield – but investors should wait for the company’s annual report to better understand their transformation under this environment.
If they execute this modernization properly, the company will benefit greatly, but there is too great an uncertainty to recommend the shares at present. If you’re looking for a stable, high-yielding dividend-paying stock Royal Mail is an attractive pick, and they aren’t about to go under, but it is important to understand management’s decisionmaking under this coronavirus period and to see the outcome of the upcoming union negotiations before initiating a significant position.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes only and should not be regarded as investment advice. This article should not be the sole basis for a financial decision, including the purchase or sale of stock. Any personal financial decision should be made on the basis of your own research and consideration of your unique financial goals and investing ideals.
