The euphoria surrounding Royal Mails (LSE: RMG) initial flotation in 2013 was a serious distraction, as itwas always destined to be a dividend tortoiserather than a growth hare. Todays trading update for the three months ended 25 June confirms that the tortoise is stillon track.
Starters orders
It posted asteady start tothe financial year, with underlying group revenue up 1% thanks to astrong performance byits European parcel delivery service GLS, offsetting a decline in revenues from its domesticparcels and letters service UKPIL. Chief executive Moya Greene said GLS continues to be the groups driving force as itexpands internationally to give the business greater geographical diversification, scale and reach. Its UK parcels business is winning new customersbut letters continue to decline, although at a slower pace than expected.
GLS posted a healthy 5% rise in underlying volumesand 6% increase in revenues, with strong growth in most of its markets, includingItaly. Revenue actually rosearound 18% on a constant currency basis, including recent acquisitions. Spanish purchaseASM is performing well ahead of expectations, while its US additionsare holding their own. Acquisitions are making the groups international operations an increasingly important part of the overall business mix, which is to the good.
Bad letter day
UKPIL revenue was down 1%, with the 3% rise in parcel revenue upendedby the 4% decline intotal letter revenue. That wouldhave been worse but for the general election, with the groupenjoyinghigher-than-expected revenues from political party mailings. At least somebody was a winner in June.Parcel volumes rose 5% thanks to new contract wins and more traffic from existing customers, withRoyal Mail Tracked services a highlight showing39%volume growth.
There are shadows hanging over Royal Mail, including negotiations with the unions over the future of its defined benefit pension scheme. The group is in talks with Unite/CMA and the CWU, recently proposing increased annual pension contributions totalling around 400m. This will continue to cast uncertainty until the situation is resolved.
Snail Mail
Greene said Royal Mails cost avoidance programme is on track to deliver around 190m of UKPIL operating cost savings this year, withtotal net cash investment ofaround 450m. The stock market was happy to take deliveryof todays update, with the stock up3.18% at time of writing. This does not negate the fact that recent performance has been dismal, with the share price down 21% over the last 12 months alone.
While GLS and UK parcels offer encouragement, Royal Mailis not a growth story. Itis what it has always been, a tempting dividend income play. And it looks attractive on those terms, with a forecast yield of 5.7%, covered 1.7 times. Todayalso looks a good entry point, given the recent share price sell-off, which has left the stocktrading at a tempting forecast valuation of just 10.4 times earnings.
Royal rewards
Be aware of a forecast 7% drop in earnings per share in the 2018 financial year, and another 1% in 2019. However, revenues are expected torise steadily, the dividend looks safe, and Royal Mail remains one of the more attractive income plays on the FTSE 100 today.