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Royal Mail share offer: what investors need to know

Your Money
Written By:
Your Money
Posted:
Updated:
27/09/2013

Interested investors have until midnight on Tuesday to buy shares in the 500-year-old company.

There has been significant interest from private investors in the Royal Mail privatisation.

Individuals interested in investing can still buy shares but the offer is scheduled to close at midnight on Tuesday 8 October.

Richard Hunter of Hargreaves Lansdown runs through what investors need to know:

Dividend policy

• Royal Mail’s predicted dividend yield for the year ending (FYE) 31 March 2014 is predicted to be between approximately 6.1% and 7.7%.

• In respect of FYE 2014, in the absence of unforeseen circumstances, the directors intend to propose a final dividend only, to be paid in July 2014, of £133m.

Investors should note that dividends are not guaranteed and, if payable, will vary.

• The company intends to pursue a progressive dividend policy thereafter taking into account the normalised earnings progression of the group.

• Royal Mail has adopted a dividend policy that supports its aim of generating value for shareholders while ensuring that it retains sufficient capital to invest in growing the business.

Other key points for investors

Some of the positives to consider:

• Royal Mail is well placed to benefit from the growth in online shopping, fulfilling the parcel deliveries – the so called “last mile”.

o It is the leading provider of postal and delivery services in the UK, with significant operations in continental Europe.

o It has an established brand, household name and a UK wide network.

• The group’s pre-1 April 2012 pension liabilities (based on service and pay up to that date) and certain pension assets relating to the Royal Mail Pension Plan have been transferred to the Government.

• Royal Mail has been undergoing a transformation programme since FYE 2008 focused on enabling it to deliver letters and parcels more efficiently and adapting the Royal Mail core network so that it can carry more parcels.

• Improved operating profit margins after transformational costs over the last three years.

• Further efficiency measures and streamlining could increase profits.

Some of the negatives and risk factors to consider:

• Letter volumes continue to decline

• The parcel markets in the UK and Europe in which the group operates are highly competitive. The group may be adversely affected by parcel operators that successfully capture some of the group’s market share.

• It is the UK’s designated universal postal service provider and delivers a “one price goes anywhere” service on a range of parcel and letter products in the UK. In future it may not be able to recover all of its costs, including the costs it incurs in providing the universal postal service.

• There is a risk that one or more material disagreements or disputes between the company and the trade unions could result in widespread localised or national industrial action.

• Potential investors should assume for the purposes of making any decision to purchase shares that national strike action and other forms of industrial action will take place across the whole of the company’s UK Parcels, International and Letters Division’s activities in the UK during the period immediately after, and may take place during, the offer period.

• The group’s performance and results of operations are significantly influenced by macro-economic trends and conditions.

• The group’s business is labour-intensive and necessitates a large workforce. The size of, and high fixed employment costs associated with, the group’s workforce in the UK may make the group less competitive compared with other postal operators in the UK.

• A large proportion of the group’s IT applications, systems and infrastructure in the UK are ageing and will require further investment and improvement in the future in order to deliver the capability to continue to support the group’s UK operations.

You can apply for Royal Mail shares either through one of the stockbrokers or sharedealing services acting as intermediaries in the offer, or HERE. The minimum application amount is £750.