2 incredibly cheap dividend stocks

[TrueBlueTerrier]

http://www.fool.co.uk/investing/2017/02 ... nd-stocks/" onclick="window.open(this.href);return false;

Today, I’m taking a look at two deeply discounted dividend stocks. First up is Royal Mail (LSE: RMG), whose shares recently slumped to a two-year low. In its latest trading update, the company warned investors of the impact of overall business uncertainty in the UK on letter volumes, especially for marketing post.

Letter volumes dropped sharply following the EU referendum, with letter revenues down 5% in the nine months to 25 December. This impacted total revenues, which fell 2%, despite modest growth in parcel volumes and revenues.

The parcels market is supposed to be the driver of growth for the company, because unlike letter post which is in long-term decline, parcel volumes are booming because of rapid growth in online shopping. Recently though, Royal Mail’s parcel revenues have not been growing by much, with volumes up just 2% in the first nine months. The company faces stiff competition from the likes of TNT and UK Mail, who are unencumbered by Royal Mail’s universal service obligation.

That said, Royal Mail does not need that much growth in volumes to deliver steady earnings growth. As a former nationalised company, Royal Mail is relatively inefficient and there is still plenty more fat to trim and burn. And management seems to acknowledge this, as it recently raised its cost-cutting target to £600m a year, up from a previous target of £500m.

Moreover, the company generates healthy free cash flow, which enables it to reduce net debt and pay sizeable dividends to its shareholders. Its underlying dividend cover of 1.9 times suggests the dividend is well covered. Royal Mail shares currently yield 5.4%, but looking forward, City analysts expect its prospective yield to rise to as high as 6% by 2019.

With underlying earnings expected to rise 10% this year, its shares are attractively valued too. Right now, Royal Mail trades at just 9.8 times its 2017 expected earnings.

[Spedley]

I totally agree and would buy if I had the money spare. I'm quite sure you could double your money in 3 years.

[Lounge Lizard]

"Royal Mail is relatively inefficient and there is still plenty more fat to trim and burn. And management seems to acknowledge this, as it recently raised its cost-cutting target to £600m a year" - but what about the workers ?

[Spedley]

I'm not quite sure what 'cost cutting targets are'?

Does that mean try to save £600M per year which makes their £300M per year profit look ridiculous or does that mean spend £600M per year in redundancies etc?

Either way it implies their profits could be MUCH larger. I could easily see their 2% margin actually be more like 20%+

[datasaint]

I totally agree and would buy if I had the money spare. I'm quite sure you could double your money in 3 years.

I wouldn't be so sure.

Like the article states most of RM's predicted growth is through parcels. With the likes of DPD/Amazon Logistics hot on their heels, if a piece of technology is released that massively undermines RMs cost, like drones for example, it'll make it hard for RM to compete when they have the ongoing commitment to the USO which costs a fortune to maintain.

[toomuchcoke]

Like the article states most of RM's predicted growth is through parcels. With the likes of DPD/Amazon Logistics hot on their heels, if a piece of technology is released that massively undermines RMs cost, like drones for example, it'll make it hard for RM to compete when they have the ongoing commitment to the USO which costs a fortune to maintain.

Drones + self-driving vans + some kind of secure parcel box that interfaces with the drones could certainly quite easily replace all the rural parcel deliveries. (Well, excluding those huge heavy boxes that might be too big or heavy for the drones or the boxes.) However they could also deliver ordinary letters as well, so no reason why the RM couldn't adopt them too. Of course it might not be worth doing so if all you're delivering is a single letter, however they could still employ a few posties to solely deliver said letters.

They could even lower the cost of those posties by having a self-driving van that has the list of addresses the postie is going to, and having a policy along the lines of "if your property is more than 100m away from the roadside then the RM will install a roadside letterbox for you to which your letters will be delivered". In fact give everyone a roadside box and you could probably have some kind of robot arm on the side of the van that would interface to the box and insert the letters, thus eliminating that postie after all.

[Aquarius]

Drones = Complete and utter nonsense

They are never going to be commonplace for deliveries in rural/urban areas.

Yes RM is in danger from Amazon due to drones flying all over the place

[Spedley]

I think drones could be widespread in the future but I can't see it getting past the 'document' courier stage in cities. Low weight time dependent goods in a local area with very high postage.

Royal Mail IS making massive profits but they are just reinvesting them to avoid wasting money. When the reinvestment is done and we have no rights left they will start declaring their earnings properly.

[TrueBlueTerrier]

[wacko74]

I totally agree and would buy if I had the money spare. I'm quite sure you could double your money in 3 years.

I wouldn't be so sure.

Like the article states most of RM's predicted growth is through parcels. With the likes of DPD/Amazon Logistics hot on their heels, if a piece of technology is released that massively undermines RMs cost, like drones for example, it'll make it hard for RM to compete when they have the ongoing commitment to the USO which costs a fortune to maintain.

The only reason Amazon, DPD etc are managing to compete with RM in the parcels sector at the moment is due to the illegally low pay and abysmal T&C's that most of their ''self employed'' workforce of courier drivers operate under... hopefully the Pimlico Plumbers judgement may have implications for our competitors which might not make them quite so competitive

[toomuchcoke]

I think drones could be widespread in the future but I can't see it getting past the 'document' courier stage in cities. Low weight time dependent goods in a local area with very high postage

I would think rurals would be the place you'd see them first ... There's a lot less in the way of buildings and people to avoid, and why would anyone be couriering documents around when you could just send the recipient an electronic copy? A self-driving van with 3 or more drones on the roof that could therefore deliver to multiple addresses at once without the van having to stop or even leave the road to go down farm tracks to properties which is a level of performance that no human is ever going to manage! The self-driving van would likely have a better safety record than a human driver too. Basically use the drones to do the last part of a delivery that a self-driving van can't do by itself.

[toomuchcoke]

I would think rurals would be the place you'd see them first ... There's a lot less in the way of buildings and people to avoid, and why would anyone be couriering documents around when you could just send the recipient an electronic copy? A self-driving van with 3 or more drones on the roof that could therefore deliver to multiple addresses at once without the van having to stop or even leave the road to go down farm tracks to properties which is a level of performance that no human is ever going to manage! The self-driving van would likely have a better safety record than a human driver too. Basically use the drones to do the last part of a delivery that a self-driving van can't do by itself.

Seems that UPS are thinking along the same lines as me? http://www.bbc.co.uk/news/technology-39051971

Okay it crashed whilst testing, but the first powered flight by the Wright Flyer lasted 12 seconds and cover 38.5m which doesn't mean I can't fly to Australia these days!

[heapsy]

Brilliant