Over the years, BT Group (LSE: BT.A) and Royal Mail (LSE: RMG) have been among the most popular shares with the UK’s retail investors, with both companies boasting a long-established heritage as well as being seen as relatively safe income providers.
A good hammering
However, in recent years the share price of both companies has taken a hammering as investors have become increasingly concerned about BT’s pension deficit and Royal Mail’s declining letter volumes. So are these dividend aristocrats living on past glories, or are they still worthy of a place in your portfolio?
In its full-year results for 2016/17, BT’s chief executive Gavin Patterson admitted it had been a challenging year for the group with it facing headwinds in the UK public sector and international corporate markets, all the while not forgetting the fallout from the accounting scandal in its Italian business.
Record fine
There was also a record £42m fine after the telecoms regulator Ofcom had found that BT’s Openreach division had misused the terms of its contracts to cut compensation payments for delays in connecting its Ethernet services to other telecoms providers, such as Vodafone. So perhaps not such a big surprise to hear the group announce a 19% decline in pre-tax profits for the year to £2.35bn. But what about the future? Does BT still represent a good long-term investment?
You may be surprised to hear that I still think it does. Management has vowed to accelerate its cost-cutting programme and has highlighted the progress it has made with the integration of EE, as well as hiking its final dividend payout by 10% to 10.55p per share. This gives a full-year payout of 15.4p per share, also up 10% on the previous year.
BT’s shares have shed a third of their value over the past year, leaving the share price hovering above four-year lows around 300p. The rising dividend remains well covered by forecast earnings and currently offers a 5.2% yield for FY2018, rising to 5.6% for FY2019. Growth may be hard to come by over the next few years, but I still think the shares offer good value at 11 times earnings, with that terrific dividend helping to protect the share price from further falls.
Out of favour
BT isn’t the only dividend aristocrat to have fallen out of favour with investors recently. The UK’s main postal services provider Royal Mail has seen its share price crashing from highs of 541p last June to lows of 400p earlier this year as it comes to terms with dwindling letter volumes due to email taking over as our favourite method of communication.
But it’s not all bad news for Royal Mail. The boom in internet shopping has given rise to an increase in parcel volumes, and I see this an area of obvious growth. Furthermore, management has worked hard to improve performance in recent years with extensive restructuring and cost-cutting programmes under way. The company is on track to deliver around £600m of annualised costs in its UK and international parcels and letter delivery businesses by the end of 2017/18.
As with BT, Royal Mail cannot be considered a growth stock, but a strong growing dividend with a 5.5% yield should be more than enough to keep income seekers happy, and prevent the share price from falling too much further.
