Today I am looking at whether Royal Mail Group’s (LSE: RMG) earnings prospects for 2014 are too good to pass up.
Make no mistake: Royal Mail’s letters business is on borrowed time, as the effect of evolving technologies on the way people communicate makes the centuries-old form of communication more and more redundant. Revenues from letters fell 4% during March-September as volumes dropped 6%, and the writing is on the wall for what once was the cornerstone of the mail service.
However, investors should be buoyed by changes to the way we use Royal Mail and the growth opportunities therein, particularly from surging growth in online retailing. Indeed, latest IMRG Capgemini e-Retail Sales Index numbers showed online sales rise 16% in the year to October. Royal Mail is on the frontline to enjoy fantastic growth here, and the carrier saw parcel revenues increase 9% in the six month period.
Further afield, the firm is also witnessing strong revenues expansion in Europe, and its Global Logistics Systems (GLS) division punched a 6% turnover improvement during March-September. GLS operates in almost 40 countries across the continent, and planned expansion here should facilitate further growth.
Elsewhere, news of an agreement with the Communication Workers Union over pay and conditions yesterday has all-but removed the threat of industrial action in the near future, a critical development for the new year. Although the new deal — which includes a 9% pay rise over three years, safeguarded working conditions and extra pension payments — does not include a no-strike agreement, the benefits and protections on offer greatly reduce the chances of a mass walkout.
This development helps to undergird earnings projections for the short-to-medium term, and City brokers expect earnings to advance 6% during the year ending March 2014, to 35.4p per share, before rocketing 30% in the following 12-month period to 45.9p.
These projections leave the mail carrier dealing on P/E ratings of 16.9 and 13 for 2014 and 2015 correspondingly, comfortably below a prospective reading of 18.2 for the entire industrial transportation sector. With the prospect of industrial action now behind it, and heavy restructuring under way to latch onto strong long-term growth opportunities, I reckon Royal Mail is a great growth pick for 2014 and beyond.
Boosted by an excellent earnings outlook, Royal Mail is also predicted to provide increasingly-lucrative returns to income investors. Indeed, the firm is expected to hike a potential dividend of 16.3p this year to 24p in 2015, payments which would create yields of 2.7% and 4%. By comparison the FTSE 100 currently carries an average yield of 3.3%.
