Long-suffering Royal Mail (RMG) investors were dealt another blow after a trading update knocked the shares down nearly 10% to a record low, continuing a bad run for the UK’s postal operator.
Ahead of the company’s full-year results in the spring, it put out a trading update for the last nine months that hit the shares despite it keeping the 2019-2020 profit target unchanged.
Investors instead honed in on the warning from management that the 2024 transformation plan could be derailed by workers going on strike this year. Otherwise, group revenues were higher than the previous period, while the letters business was boosted by the December General Election.
John Moore, senior investment manager at Brewin Dolphin, says Royal Mail investors will have been unsettled by the lack of clarity on the company’s dividend and capital spending plans, as well as the “highly cautious tone” struck by the management.
Indeed, it’s been a tough few years for owners of Royal Mail shares, many of whom are retail investors who bought into the discounted IPO in 2013 and have clung on for the dividends – it was ejected from the FTSE 100 in 2018 and changed its dividend policy in 2019. Shareholders were told at the time that the dividend could be boosted in good years for the company, but in the short-term a 25p per share payout was slashed to 15p.
Industrial action has also unsettled the outlook for the firm, with the CWU union balloting its members for strike action. The volume of delivered letters, Royal Mail’s core business, keeps falling.
Dividend Cut Coming?
Helal Miah, investment research analyst at The Share Centre, thinks a further dividend cut is likely now the share price fall has pushed the yield sky-high. Morningstar Direct data shows the yield at nearly 13%, and that's without taking the latest 10% share price fall into account.
“Investors are getting increasingly concerned that Royal Mail’s once attractive dividend has now reached unsustainable yield levels,” he says.
Shares in Royal Mail lost 17p to 171p after the update, having started the year at 231p - it's a loss of 25% in just six weeks. The shares, which floated at 330p in a high-profile IPO, are down 72% from their May 2018 high of 631p in May 2018. Chief executive Rico Back took over from Moya Greene in June 2018, and Royal Mail’s share price has struggled since.
According to Morningstar data, the Investec Premier Global Value fund has the biggest stake as a percentage of its portfolio, with 5.6% in Royal Mail. Fund manager Schroders owns more than 5% of Royal Mail via a number of its funds, including Silver-rated Schroder Recovery, which allocates nearly 3% of its assets to the postal operator. Standard Life Aberdeen owns just under 6%, while BlackRock has nearly 5%.
Apart from the cautious outlook, some commentators saw some positive elements to the update, however. “An increase to group revenue, including a rise in revenues at its UK parcels and letters business, is good news for Royal Mail,” says Brewin Dolphin's Moore.
Hargreaves Landsdown equity analyst Nicholas Hyett adds: "There’s good news hidden here as well, with the European business growing strongly. It shows that post can be made to pay."