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Royal Mail future dividends could disappoint, warn analysts

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
22/05/2014

Analysts have cast doubts over Royal Mail’s future dividends following the release of the group’s first annual results since floating on the stock market.

Profits at the group have increased 12 per cent from £598m a year ago to £671m, boosted by a rise in revenues from its parcel delivery business and a modest increase in sales.

However, while Royal Mail delivered its first £133m dividend as promised, Justin Cooper, CEO of shareholders solutions at Capita Asset Services, said future dividends could easily disappoint.

“Royal Mail delivered its first £133m dividend as promised, and we are comfortable with our £200m forecast for this year at least,” he said.

“Most investors flooded into the stock when it floated because the yield looked so appealing. That’s not the case any longer.

“Even after the sharp fall in the share price after the results were published, the yield is not attractive compared to the rest of the FTSE 100.

“What’s more, with the management admitting competition is eating Royal Mail’s direct delivery lunch, future profits are at risk. That means future dividends could easily disappoint. Investors may conclude there are better places to find a reliable income.”

Royal Mail chief executive Moya Greene admitted the group faced “a couple of headwinds,” including competition from rivals.

She said: “The competitive environment on the parcels side is more intense. We are taking steps to remain the leader in this growing market. On the letters side, the headwind is direct delivery and we have strategies in place to counter its adverse financial impact.”

Meanwhile, stockbroker The Share Centre advised investors to ‘hold’ the share amid competition concerns.

“Management continues to focus on cost cutting and improving company performance, however the increasing competition raises concerns,” said analyst Graham Spooner.

“As a result, the company’s growth prospects in the short to medium term have been questioned, causing a divergence of opinion amongst analysts. This, alongside the current share price valuation, means we continue to recommend investors ‘hold’ Royal Mail.”