With an expensive long-term investment plan, the future may seem bright but dividends look to be cut significantly.
Royal Mail (RMG) sends shares upwards with rise in profits
- Second daily parcel delivery by 2023 is welcomed by investors and recipients alike.
- Increase in both revenues and pre-tax profits despite 8% fall in letter volumes.
- Dividends are expected to drop to 15p in future years, so we currently view the shares as no better than a hold.
Royal Mail delivered better than expected full year results today, but a new long term £1.8bn investment plan means that future dividends will be cut significantly. While full year dividends rose to 25p this year the company said they will drop to 15p in future years although that may be higher based on cash flow levels. Royal mail reported a 4% rise in revenue to £10.6bn alongside a 14% increase in pre-tax profit to £241m. Letter volumes dropped 8% but GLS, the overseas parcels business, saw an 8% increase in revenue.
The market had already priced in the dividend cut and so chose to focus on the better than expected performance and investment plans, shares rose as much as 8% in early trading. However it must be noted that this comes after a year which has seen them plummet by 60%. Some people thought the government floated the company too cheaply in 2013 at 330p per share, but it is beginning to look like taxpayers actually did quite well out of that.
Our View on Royal Mail - Hold
The investment plans and the second daily parcel delivery by 2023 are welcomed and a sign that the company is responding to growing parcel volumes. However, the cut in the dividend is clearly a negative so the shares are no better than a hold.
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