MIDAS SHARE TIPS UPDATE: Dividend cut sounds the last post for Royal Mail
Royal Mail is an old-fashioned, unionised and regulated business trying to drag itself into the 21st century. It is not doing very well.
Last week, chief executive Rico Back admitted that the dividend would be cut from 25p this year to 15p next, remaining at that level for the foreseeable future. There may be additional, ad hoc payouts, when the company can afford it. But there are no guarantees.
Shareholders have every reason to feel aggrieved. Most of them acquired the shares when the company was floated in 2013. Then the price was £3.30 and, as it soared, Government Ministers had to fend off accusations that Royal Mail had been sold on the cheap. Happy days. On Friday, the shares closed at £2.11. So what should shareholders do now?
Ever since Royal Mail was floated, the group has pinned its hopes on parcels and productivity.
So far, those hopes have proved misplaced. Royal Mail’s annual results to March 2019, released on Wednesday last week, are full of specific costs, charges and other items – a common theme for the company. But letter volumes are falling and the rest of the business is not doing well enough to compensate.
In October 2018, Royal Mail issued a profits warning, precipitating a big fall in the share price.
Then, all hopes were pinned on the dividend, which seemed to be safe.
Midas suggested investors should hold the stock at least until the interim figures were published the following month.
The stock duly rose from £3.45 to £3.67. It has been downhill all the way since then. Back has a five-year plan to turn Royal Mail round but it is hard to see how he will succeed.
Meanwhile, the dividend is no longer secure and the future of the firm is in question as Labour leader Jeremy Corbyn wants to renationalise it.
Ultimately, there is little way of knowing whether Back’s attempts will prove successful. But the odds do not look good.
Midas verdict: Even after last week’s dividend cut, Royal Mail is a strong income stock, yielding more than 7 per cent. Diehard income seekers may opt to keep the shares on that basis. Anyone else should sell.