Parcels delivery service Royal Mail (RMG) hiked its dividend by 4% despite reporting a 6% drop in adjusted operating profit. The former state-owned postal service reported operating profit before transformation costs of £712m for the year to 31 March 2017, down from £742m a year earlier.

It blames ‘business uncertainty’ and falling letter volumes, down 6%, for the performance. Royal Mail warns that if prevailing conditions continue it would expect that rate of letter deliveries decline to go on.

But investors have shrugged off those concerns with attention firmly fixed on income. To that end today's 4% increase in the payout looks a minor victory. It will also bolster confidence in future dividends, with consensus forecasts anticipating a 23.8p per share payout this year to March 2018, implying a 5.4% yield.

That yield is based on a share price of 439.8p, up around 2% today.

royal mail graph

But not everyone is fully convinced. Cantor Fitzgerald analyst Robin Byde remains cautious on the stock given the company's mixed outlook and its need to restructure the pension plan. That last point is pressing. Royal Mail's pension plan is currently in surplus yet management warn of up to £1.15bn a year extra costs in future to keep it going in its current form.

Cantor's Byde believes if Royal Mail can provide a clearer growth plan, the stock could become really attractive to investors. Yet that remains a big if.

Ofcom threatened in March over potential significant fines if the group continued to miss delivery performance. Investors should be relieved it managed to exceed its 93% target of delivering first class mail within one working day.

UBS analyst Dominic Edridge says the results beat expectations, driven by a 3% increase in parcel volumes.

Issue Date: 18 May 2017