UK postage and package service’s dividend keeps investors happy.
UK post provider Royal Mail (LSE:RMG) will report full-year numbers on May 19, looking to build on a strong Christmas performance. Investors will also be keen to know if the group’s hefty dividend will continue to drop through the letterbox.
Speaking at the company’s nine-month trading update in late January, Royal Mail’s CEO Moya Greene said that the company enjoyed a strong Christmas period, with higher volumes handled, while the outlook for the remainder of the year was in-line with previous guidance. The company handled 130 million parcels in December, up 6% on the previous year, and remains on track to deliver at least a 1% reduction in underlying costs for the full-year, according to Greene.
Analysts expect Royal Mail to deliver full-year pre-tax profits of £455.8 million against £569 million in 2015.
What do the analysts think?
According to analysts at Bank of America Merrill Lynch, with operating performance remaining relatively buoyant and with the potential to begin stemming market share losses in parcels, “we believe Royal Mail offers significant upside”.
In late April, analysts at Credit Suisse upgraded Royal Mail to neutral from underperform and raised their target price to 490 pence from 400 pence, UBS nudged its target price eight pence higher to 488 pence in March with a neutral rating, while in February, Goldman Sachs cut its price target to 605 pence from 610 pence and kept its buy recommendation.
Royal Mail’s dividend underpins the shares
While RMG faces challenges in the UK letter market and while other competitors continue to circle the parcel sector, the yield on the company’s shares is still attractive and provides a healthy backstop. Last year’s 21 pence dividend was covered 1.5 times by free cash flow while 2016’s dividend pay-out is expected at 21.8 pence – a 4.5% yield – sharply higher than ultra-safe UK government bonds where the 10-years offer a paltry 1.43%.