My fiancée has been nagging me over the weekend.
Nothing unusual there – but the subject was different from the usual complaints about misplaced socks and dirty dishes in the kitchen sink.
Instead my beloved wants to know if she should sell her Royal Mail (LSE: RMG) shares.
She was keen to buy after I wrote a positive article on the privatisation last month. But neither of us expected to see such a large spike on the first day of trading – the shares closed at 455p on Friday night, up 38% from the offer price.
So is now the time to ‘flip’ the shares – to take a quick profit and sell?
There’s more to Royal Mail than just postage stamps
For now, let’s assume that the share price sticks at around 455p. That values Royal Mail at £4.55bn with a dividend yield of 4.4%.
At first glance, that’s not a bad yield for a company that operates in a growth sector – parcels.
But as I said a month ago, Royal Mail also operates in a rapidly declining market – letters. So the big question is whether Royal Mail’s parcels business can grow rapidly enough to offset the decline on the letters side.
Remember also that Royal Mail needs to invest in new equipment for its parcels business, and there’s a good chance that postal workers will go on strike later this month. What’s more, competition in the parcels market is expected to increase.
So there’s actually quite a lot of risk here. If we’re just looking at the trading business, I don’t think that a 4.4% yield is enough to compensate me for the level of risk involved.
However, there’s one other issue to bear in mind. Royal Mail is more than just a trading business. It also owns a fair bit of property, some of which is surplus to requirements.
Royal Mail’s offer prospectus highlighted three sites in London that could be sold off, including an eight-acre site in Islington called Mount Pleasant.
The Labour party has suggested that the value of these sites could be huge – possibly as much as £1bn for the Mount Pleasant site, and £500m for another London site.
Wow. If Labour’s valuations are correct, Royal Mail looks cheap at even £4.55bn!
But before you get too carried away, Royal Mail said in its prospectus that the total freehold property estate – comprising 1,000 properties in all – is worth only £793m.
In other words, it reckons that its total property portfolio is only worth about half as much as the Labour party says just two of its properties are worth.
So who do you believe? Royal Mail or Labour?
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd
Don’t let your investing be guided by political propaganda
Well, I suspect that the figure in the prospectus may well be on the low side. As a relatively illiquid asset, property is not easy to ‘mark-to-market’. And given the buoyant London market, Royal Mail’s sites could easily be worth more than the company has given it credit for.
However, I also think it would be very risky to make an investment decision on the back of what is basically Labour party propaganda. (I hasten to add, I’d say the same for any other political party’s propaganda.)
So as far as I’m concerned, the prudent approach is to ignore the property issue and just value Royal Mail on the basis of its trading performance.
Given that the risk of things going wrong at Royal Mail is quite high, I think it’s reasonable to expect a pretty chunky dividend as a reward for taking the risk.
So, for me, the minimum acceptable yield is 6%, which works out a share price of 333p. That’s just above the 330p price at which the government sold its shares. So I’d sell.
Unfortunately my fiancée bought her shares via the Royal Mail nominee website, which means she won’t be able to sell her shares before Tuesday at the earliest. Hopefully, the price will still be at or around 455p at that point.
If that’s still the case, I’d consider selling. In fact, I’d consider selling at any price above 350p.
At least she can then pocket a little profit and not take on the risk of Royal Mail’s business being destroyed by obstreperous unions or well-funded overseas competitors.
(Just to be clear, I didn’t apply for any Royal Mail shares myself – largely because all my spare cash has been swallowed by the cost of my imminent wedding and honeymoon.)
Our recommended articles for today
When investing, it’s vital to weigh up risk against reward, says Bengt Saelensminde. Safety must be your number one priority.
Medical technology is progressing at dizzying speeds. David Thornton profiles some incredible products, including the ‘bionic’ suit that allows paraplegics to walk.
New to MoneyWeek?
Welcome, and thank you for visiting us.
Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.
If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.
Every working day the MoneyWeek team sends out a hard-hitting email, 'Money Morning', giving you a rundown of the latest financial events, and revealing what you should do to maximise profits and head off losses…
And with your permission, I'd like to send you Money Morning for FREE.
To sign-up enter your email address below.
We hope you enjoy your stay on the site. Good luck with your investments!
Digital Managing Editor, MoneyWeek