Royal Mail (LSE: RMG) has just delivereditstrading update covering the nine months ended 25 December and disgruntled investors have marked it return to sender, with the stock down sharply. However, theres a positive side to this morningsnegative reaction.
Beta Mail
The stock market certainly didnt welcometodays results package, with Royal Mailsshare price down 5.83% at time of writing. Addressed letter volumes fell 6% and revenues 5%, which includes the crucial Christmas rush period. Everybody knew letter volumes would decline but the rate of slippage appears to be accelerating. Royal Mail reported flat revenues as a result, withincreased business uncertainty hitting volumes, notablyin advertising and business mailings. I can only see thatletters will continue to sink asaflood of electronic mail gets even bigger.
Parcels are a different matter. Royal Mail needs strong growth in this area to offset letter declines. It should be helped by the growing shift to online shopping even though its hindered by Amazon and specialist deliveryrivals.Parcel volumes rose 2% and revenues 3%. However, Parcelforce Worldwide volumes fellby 1%, whichpartly reflects avery strong prior period, and more worryingly, what the group calls the increasingly competitive express parcels market.
Dead letter day
Its pan-European parcel delivery service General Logistics Systems (GLS) was the star performer with 9% revenue growth, which partly offset a 2% dip in the larger UK Parcel, International and Letters (UKPIL) division. Overall, grouprevenue was flat.
You can see why the market has reacted in such a negative way. Royal Mailwill continue to restructure as it seeks to lessen the blow from declining letters and take advantage of the boom in parcels thanks to internet shopping. Management also has further scope to improve performance and cut costs, with chief executive Moya Greene pointing out that its cost avoidance programme remains on track.
Given todaysmixed postbag you wont be surprised to see that the Royal Mail share price has continued its decline from the post-flotation high of around 615p this time three years ago. Today, it trades at just 423p. On the plus side, the stock no longer looks overpriced, trading at 10.88 times earnings. Todaysdrop could prove an attractive entry point for income seekers, with the stock now on a forecast yield of 5.3%, fairlywell covered 1.7 times. That looks attractive for what remains a relatively stable and secure business.
Part and parcel
I wouldnt pin too much hope on the stocks growth prospects. Earnings per share growth isforecastto hover between zero and 1% over the next three years, while profit growth is also likely to be slow. The company also faces tricky negotiations with the union over its final salary pension scheme, which so many other companies have replaced with cheaper but inferiormoney-purchase schemes. Royal Mailcurrently pays350m of cash each year into its scheme. The staff consultation period ends in March, although the companys proposals may be delayeduntil April 2018.
Royal Mail is a slow but steady income play. Snail Mail, you mightcall it. But its still worth a place in a balanced portfolio.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.