Shares in Royal Mail (LSE: RMG) were a steal at their flotation price of 330p. It was just a shame that private investors could only get their hands on a £750 allocation at that price. The shares have been comfortably over 600p since then, but have now fallen back below 450p as the company has run into a few problems.
On Tuesday this week Royal Mail said that its letters business was doing a bit better than it had previously expected. Unfortunately, its parcels business – where there is supposed to be lots of potential profits growth – has not done as well. Parcels are a nice earner for delivery companies and it seems that the competition for all that online shopping is heating up. As a result, Royal Mail won’t make as much money as it thought it would from parcels this year.
The company says not to worry though. It’s cutting costs faster, so the all important analyst forecasts, including earnings per share of around 37p, are still on track to be met. Royal Mail will have to reassure investors on the potential for its parcels business, but the company still has one key thing going for it: surging cash flows.
As Royal Mail comes to the end of some big investment projects, it looks as if the company is going to have a lot of spare cash after it has paid all its bills. This will allow it to pay down debts and also pay bigger dividends. The shares now trade on a prospective dividend yield of 4.7%, and there’s plenty of potential for that payout to rise. Royal Mail looks worth buying once again.
Verdict: buy for dividends