Royal Mail shares: pros and cons

Royal Mail shares: pros and cons

If total returns are close to the yield, as our online readers predicted, we can expect Royal Mail’s share price to be broadly flat over the next decade.

To help you decide whether to buy, which you would have to do by Tuesday, we asked fund managers what they saw as the company’s key strengths and weaknesses.

Reasons to buy

Parcels

This side of the business is growing, thanks to online shopping. Even after accounting for the declining letters arm, overall sales should rise by 2pc-3pc a year, said Chris White, the head of UK equities at Premier Asset Management.

Cost cutting

A continuing restructuring programme should lead to costs falling by 2pc-3pc a year, Mr White said.

Dividends

These two factors taken together should mean bigger profits and cash flow, leading to “attractive” dividends, he added.

Management

Royal Mail’s chief executive, Moya Greene, is much admired. George Godber, co-manager of the Miton UK Value Opportunities fund, said she was “very impressive indeed – she’s done an amazing job”. He described Royal Mail as “a fascinating business” that delivered 59 million items a day to 29 million homes, “a pretty incredible set-up”.

Distribution network

Anthony Cross, co-manager of the highly regarded Liontrust Special Situations fund, said Royal Mail had “a strong distribution network, which obviously can’t be easily replicated”.

Property

Royal Mail has surplus freehold property in central London that could be worth £500m, Mr White estimated. He said the company’s finance director had confirmed this week that any proceeds from a sale would not go to the indebted pension fund, so they could be returned to shareholders.

Reasons to avoid

Workforce

Mr Cross said the company faced strike threats from its unionised workforce. However, Mr Godber said Ms Greene had been “complimentary about the unions, their approach and goals” this week. Mr White added: “The workforce has already been reduced but the company is still overmanned and its financial performance is very sensitive to its costs.”

Letters

A senior manager at an asset management group said it was a mistake to paint Royal Mail as a “no-brainer” on the basis that the shares could be relied on to pay a 6pc dividend yield every year.

“Every 1pc fall in letters volumes cuts the company’s sales by £75m – and it expects an annual decline of 4pc-6pc. Let’s say the decline is even worse at 9pc – this would mean £225m a year less cash coming into the business than expected. And £200m is the amount we expect it to spend on dividends.”

• The latest news on the Royal Mail share sale: telegraph.co.uk/investing

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