Royal Mail rebases dividend with profits at lower end of guidance

Royal Mail rebases dividend with profits at lower end of guidance

UK postal and courier service Royal Mail Plc (LON:RMG) has announced that it will downwardly re-base its dividend following its latest trading update, with postal revenue struggling and being offset by additional costs.

Basic rundown

The recent performance of this well-known UK household name, having been privatised in 2013, has been attributed to a decline in the volume of letters, with the strains of this decline being compounded by additional costs coming into play during the financial year.

Adhering to the company’s preferred measurement of performance, adjusted operating profit before transformation costs fell 27% to £509 million. This figure is somewhat foreboding given that it falls within the lower end of the firm’s £500 to £530 million guidance, which was already a downwardly revised performance prediction.

That being said, there are some positive takeaways. Despite decreasing volumes, revenue increased 2% to £10.58 billion, and pre-tax profit followed this trend, up from £212 million to £241 million during the full year through March. However, this rise was linked to a lower pension charge.

Royal Mail’s comments

“Our ambition is to build a parcels-led, more balanced and more diversified international business, delivering adjusted group operating profit mar gin of over 4% in 2021-22, increasing to over 5% in 2023-24,” said Royal Mail Chief Executive, Rico Back.

“At the heart of our refreshed strategy is a UK ‘turnaround and grow’ programme.”

“In 2018-19, after a challenging year, we delivered productivity improvements and cost avoidance in line with our revised expectations.”

“Over the next five years, through a focus on new ways of working and extending our network, we will ensure a contemporary UK Universal Service.”

“The investment in the UK, and expected lower cash flow in the early years, means we are rebasing the dividend and changing our dividend policy.”

“This is not a decision we have taken lightly as we know how important the dividend is to our shareholders.”

“We have sought to find an appropriate balance between sustainable shareholder returns, and investing in the future.”

“GLS is a key part of our strategic plan and will make a major contribution to our product and geographical diversification.”

“By combining the best of Royal Mail and GLS, we will enhance our cross-border proposition in this large, growing and global market.”

Portfolio considerations

The company increased its full-year dividend from 24p to 25p a share on-year. It also said that it would have a full-year dividend underpin of 15p per share, which could be supplemented by payouts during years with substantial excess cash flow.

Despite the mixed update, the company’s shares rallied 13.4p or 6.34% in morning trading, up to 224.8p a share at 22/05/19 11:22 GMT. Analysts were unable to reach a consensus in their forecasts, with Liberum Capital reiterating their ‘Sell’ rating, Barclays Capital (LON:BARC) reiterating their ‘Sell’ rating and JP Cazenove reiterating their ‘Overweight’ stance on Royal Mail stock.