Ofcom tells Royal Mail to get on with it

Royal Mail Group shares fell almost 4% at one stage Tuesday after the industry regulator decided not to impose new regulatory conditions on the postal firm's direct-delivery competitors. Ofcom does not think the universal postal service is under threat, which means Royal Mail will get no outside help in its fight against the competition.

Says Ofcom: "Having carefully assessed this evidence, including the confidential business plans of Royal Mail and its largest competitor Whistl, Ofcom does not believe the universal service is currently under threat from competition in the 'direct delivery' market, where operators collect and deliver letters themselves without using Royal Mail's network."

In fact, the industry watchdog reckons that competition will actually provide Royal Mail "with a further incentive to become more efficient. Continued progress on efficiency is crucial if the universal postal service is to be financially sustainable in the longer term."

There may be a further review of competition, said Ofcom, but not until "near the end of 2015 if necessary."

But there are some pluses. Ofcom did say it will intervene "swiftly" to protect the universal service - Royal Mail's promise to deliver letters and parcels six days a week to every address in the UK at a uniform price - if it believes the service's future is threatened.

It will also begin a broader review of factors affecting Royal Mail's ability to deliver the universal postal service, which is expected to wrap up in 2015.

What's more, the company will be allowed to vary prices for access services in different parts of the country depending on the costs of delivery in those areas. That will at least let Royal Mail "make a fair profit" on all 'access' letters irrespective of where they are delivered.

Royal Mail shares have fallen 14% since mid-November's disappointing interim results. Now at 405p, they trade on nearly 13 times Panmure Gordon's earnings per share (EPS) forecasts for the year to March 2015, dropping to 12.2 the year after. There's a tempting prospective dividend yield of 5%, but that record low at about 390p appears to have a magnetic pull on the shares right now and could be tested at some point.