Royal Mail shares deliver spectacular crash

by Richard Hunter from interactive investor |

There's a tempting dividend yield, but our head of markets is unconvinced after this disaster.

Royal Mail (LSE:RMG) has again delivered a mixed bag of numbers, as the increasing pressure of a letters market in terminal decline continues to bite. Investors have rushed for the exit, sending the Royal Mail share price plunging 17% in quick time.

The group admits that its transformation plan is behind schedule. Yet the reduction in the letters and cards market, largely offset by the explosion of parcel deliveries arising from online shopping, is hardly a new phenomenon. 

The fact that the addressed letters part of the business is expected to decline at a higher rate of between 7% and 9% this year is proof, it were needed, that Royal Mail's business mix needs to change rapidly.

Revenues should be boosted by the Christmas post, including General Election flyers and the like, but the group overall retains a large exposure to traditional mail. 
 
The headline numbers have suffered accordingly, with adjusted operating profit down 13%, adjusted pre-tax profit plunging 20% and adjusted operating costs up 2.9%. 

In addition, net debt has spiked sharply higher to £1.37 billion and the recently threatened strike action has inevitably taken up management time, which could have been better spent on strategy.

Source: TradingView Past performance is not a guide to future performance

There are some glimmers of hope, not least of which is a defiant management outlook statement which promises to deliver the necessary transformation.

In the meantime, there are certainly signs of life within the parcels business, where UK revenues rose 5.6%. The jewel in the crown in the form of the international GLS division contributed higher revenues of 14.1% and a growth in adjusted operating profit of almost 17%.

Innovations such as the roll-out of 1,400 parcel postboxes across the UK are a welcome development, while parcel automation machines now process 26% of overall traffic, as compared to just 12% last year. 

Despite the previously announced cut, the projected dividend yield still stands at an attractive 6.5% and is, for the moment, adequately covered.

Even so, the mauling of the share price by the ever-present bears of this stock compounds a sorry performance. The current price of under 200p, and near a record low, compares poorly to the float price of 330p in 2013, let alone the peak of 631p in May last year. 

Over the last 12 months the shares have lost 41%, as compared to a 10% rise for the wider FTSE 250 index, and the situation could yet worsen as the likes of Amazon (NASDAQ:AMZN) and Deutsche Post (XETRA:DPW) continue to encroach into Royal Mail’s territory.

As such, the market consensus of the shares as a 'sell' looks likely to remain firmly in place. 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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