The problems at International Distributions Services (LSE: IDS) — which also calls itself IDS — continued last week as its Royal Mail unit posted a £319m loss for the first half. It was yet another blow for IDS stock, which has been struggling for years due to service issues and strikes.
While everything seems to be going wrong for the group, it could be argued it’s at a low ebb. Is there an opportunity here for a cheap buy? Or should I steer clear of this falling knife? Let’s explore.
Before answering those questions, it’s worth breaking down the latest earnings. While Royal Mail suffered that £319m loss, the other side of IDS – parcel delivery service GLS – made another handsome profit. For the six months to September, GLS turned a £150m profit, enough for IDS to fund a modest dividend.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
These contrasting fortunes are the key issue for me. Clearly, International Distributions Services can run a profitable delivery business, but the challenge of running Royal Mail is too much at present. So what’s going on then? Well, IDS management believes the Royal Mail issues are broken down into two parts.
The issues
The first is the ongoing industrial action on the part of its workforce. The Royal Mail service has been crippled as a result of the strikes and they were at their worst last year. It’s little surprise that so much service disruption has hampered the bottom line. The good news here is a pay deal has been agreed, which might be the end of it.
The second issue is the more serious one, for me. I’m referring to the unique challenge of running Royal Mail, and that is its Universal Service Obligation. The USO mandates that some services must be available for every single member of the British public. For mail, this means a ‘one price goes anywhere’ letter delivery service for six days a week.
I think most of us welcome this law. The USO provides a better service for every member of society. But of course, it makes it harder for a private firm like IDS to profit from running it.
The result is that CEO Martin Seidenberg has called for a change in regulation, asking for the government to “do their bit”. The reasoning is that the network isn’t set up to deal with 7bn letters a year when it used to deliver 20bn letters.
Not spectacular
On the one hand, these demands seem reasonable from a service perspective. But on the other, it makes me question how viable a national letter delivery service is as a private enterprise, and even whether it was a good idea to privatise it in the first place. The results so far haven’t exactly been spectacular.
I imagine the USO problem will only get worse as fewer letters are written. Moreover, if IDS can’t turn a profit with first-class stamps now at £1.25, I’m not optimistic about the future of the business. I won’t be buying any shares.
