Royal Mail: Anything to Write Home About?

By Robert Sutherland Smith

I last looked at Royal Mail (RMG) some three months or so ago. I am pleased to say that I saw value in them because they were then 390p. Turning to look at them once more, I feel that they continue to have attractions, despite the near-15% appreciation in the share price since then.

Those attractions include the PEG ratio for the current year to 31st March 2015, a good looking share chart, an above average estimated dividend yield, and some decent equity asset backing. Its Achilles heel of course is the legacy from its nationalised predecessor to deliver letters to all parts of the country at one universal price, whilst it competitors choose the low unit cost neighbourhoods only. Its smaller parcel delivery services also have competition, notably from Amazon which wishes to rule the world and pay corporation taxes elsewhere. However, it’s not all gloom and doom.       

The PEG Ratio is a market valuation tool which compares growth in earnings per share with the price earnings ratio at the time. It may not be scientifically proven but it is a pragmatically useful, common sense approach to value. Basically, it holds that a share is good value if the PER is below the earnings growth number. In the case of Royal mail, earnings this year are estimated by market consensus to increase by 22%. At the current share price, those earnings are valued on a price to earnings ratio – PER – 14 times which gives a PEG of 0.6.

Although earnings growth is estimated to decline next year, the dividend payout is at the same time estimated to rise by more than 5% to 1.52p a share, producing an estimated dividend yield for 2015/16 of 4.8%, and rising a further estimated 2.7% to 5.0% in 2016/17. Although the current market consensus of earnings estimates is for only 1% growth next year, a 10% rise is pencilled in for the following year.     

The Royal Mail share price chart appears to have broken its downtrend – something that can easily be checked by looking at the chart yourself which you should do since it is critical to the case. My interpretation is that the year downtrend ended with a January breakout.

The share also has a balance sheet book value of net assets attributable to ordinary shareholders of an estimated 274p – or about 60% of the share price of 448p – last seen. Of that, most seems to be old fashioned net tangible assets. Equity gearing also seems to be reasonable at just under 35%.

Turning to the competition, the company has the advantage of a deal with the national Post Offices system which is being revamped to be open more hours in order to enable customers to collect deliveries, which reportedly has attractions for small business. I also noted reports over Christmas that Amazon was using a lor of Royal Mail services.

For those investors looking for an above average dividend yield, I suggest that Royal Mail is a share you should at least have a look at. To repeat: the market consensus estimates a modestly growing (but above near term estimated inflation) dividend payout over three years to and including the year to March 2017.