It’s been quite the second half for Royal Mail (RMG) as parcel activity soars and it surprises the market with earnings upgrades, and today is no different with the company announcing a one-off dividend after reviewing its performance over the past year.

Royal Mail stock has been a big beneficiary of the value rally sweeping markets, and its shares have doubled since November.

The stock gained 2.5% this morning to 522p following the dividend news, with Royal Mail reiterating full year adjusted operating profit of £700 million. In fact, the stock is not that far off being a five-bagger since hitting a low of 124.3p on 3 April.

The firm has declared a payout of 10p per share which will be payable on 6 September to shareholders on the register at 30 July 2021. Royal Mail said it would announce a new dividend policy with its annual results on 20 May.

REVERSAL OF FORTUNES

It’s been quite the reversal of fortunes for the previously struggling Royal Mail as bumper activity over Christmas spills over into the new year, with the earnings upgrade to £700 million well ahead of its adjusted operating profit of £325 million in the previous year.

The latest update comes after Royal Mail said in a trading update on 10 March that its recent letter volume and revenue trends have been ‘more robust than anticipated’, with advertising, business and stamped mail all performing above its previous expectations.

GLS UNIT TO DOUBLE PROFIT

Royal Mail also gave an update on its GLS international logistics unit, which is expected to more than double its operating profit to €500 million over five years.

From the 2020 financial year to the 2025 financial year, GLS is also expected to grow revenue at a compound annual growth rate of around 12%, from €3.61 billion.

In addition, it’s expected to generate €1 billion of free cash flow, while capital expenditure over the period is set to remain in the range of 3%-to-4% of revenue.

For the 2021 financial year, GLS’s adjusted operating profit is expected to be around £350 million (€390 million) with an adjusted operating profit margin around 8.7%.

‘ROYAL MAIL IN SWEET SPOT’

AJ Bell investment director Russ Mould said Royal Mail is ‘currently in a sweet spot’ as the pandemic has accelerated the shift from physical to online retail, ‘thereby creating a massive tailwind for companies that deliver parcels’, and that it will be hoping the trend continues when people go back to work in offices and get out of the house more.

Mould said, ‘Even though the decline in letters is hard to reverse, Royal Mail still has significant opportunities on the parcel side and to grow its overseas operations.

‘Unfortunately, it doesn’t yet know the full impact of higher costs of cross-border delivery. There is growing anecdotal evidence that many companies in the UK no longer feel it is worth bothering to sell goods to overseas customers because of a large increase in delivery costs and paperwork. That could have a negative impact on Royal Mail from lost earnings.

‘Like many so-called lockdown winners such as AO (AO.) and Kingfisher (KGF), Royal Mail has been given a sales tailwind just when it really needed it. The big question is whether it can sustain the momentum once the pandemic fades away.’

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Issue Date: 30 Mar 2021