Company in the news: Royal Mail Group

Shares in Royal Mail were a steal at their flotation price, but have now fallen back as the company has run into a few problems. Phil Oakley asks if it's time to buy.

Shares in Royal Mail (LSE: RMG)were a steal at their flotation price of330p. It was just a shame that private investors could only get their hands on a £750 allocation at that price. The shareshave been comfortably over 600p since then, but have nowfallen back below 450p as the company has run into afew 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 supposedto 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.

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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

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Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.