Here’s why I’d consider this high-yielding FTSE 100 giant over Royal Mail

The market likes the latest update from Royal Mail plc (LON:RMG), but Paul Summers thinks there’s a far better FTSE 100 (INDEXFTSE: UKX) option for buy-and-hold investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in income favourite Royal Mail (LSE: RMG) rose over 3% this morning as market participants welcomed its latest update on trading. 

Meeting the company’s own expectations, total underlying revenue rose 2% over the three months to 24 June, which also saw Rico Back assume the role of CEO at the FTSE 100 constituent. 

Performance at its overseas-focused General Logistics Systems (GLS) was particularly encouraging. Recording an 11% rise in revenue, the company stated that growth had been achieved “in almost all markets” with strong performance in Italy, Denmark, and Spain. Double-digit growth was also registered in Poland and the firm’s other Eastern European businesses. 

In contrast to this, business in the UK was mixed. Continuing a trend that won’t surprise those already invested, total letter revenue fell by 7%, while revenue from parcels came in 6% higher. 

On a price-to-earnings ratio of just 12 before today, you might assume that Royal Mail is attractively priced, particularly given the stonking 5.2% dividend yield on offer. Whether this represents decent value on a long-term perspective is harder to say.

While stating that its outlook for the full year was unchanged and that a 4-6% fall in addressed letter volume was still expected, the £4.8bn-cap went on to remark that the latter “may fall outside the range in a period” due to the introduction of GDPR and ongoing business uncertainty. Although growth is expected to continue at GLS, the company also revealed that ongoing labour market pressures were likely to impact on margins going forward. That’s not particularly bullish in my book.

Regulator Ofcom — and its decision to investigate the Quality of Service provided by Royal Mail — is another potential thorn in the firm’s side. Despite remarking that it welcomed the opportunity to provide information on “a number of factors” that hindered performance and how it intended to address these going forward (what else could it say?), this issue is precisely why I’m wary of investing in stocks like Royal Mail.

As part of a diversified portfolio, I wouldn’t necessarily dissuade someone from building a stake (particularly as its share price is still 20% off the highs reached in May). As a buy and hold investment, however, it certainly wouldn’t be my first pick from the FTSE 100.

Commodity boom ahead

Trading at 10 times forecast earnings, shares in mining goliath Rio Tinto (LSE: RIO) offer a 6% yield in 2018, based on an expected 10% increase to the total payout. Note that this hike is over double that forecast from Royal Mail.

Today’s Q2 production figures looked decent enough with CEO J-S Jaques adding that operational performance had been “solid across most commodities, rounding out a strong first half performance for the Group“.

Aside from above, another reason I like Rio is based on the expected surge in demand for electric vehicles and renewable energy over the next few years — a development that’s likely to put a rocket under prices of several metals going forward, including copper. Indeed, recent reports suggest that the £70bn-cap is looking to splash the cash on assets to ensure it’s positioned itself for a likely boom in the red metal. Should it be successful in making a number of suitable acquisitions, I think the outlook for Rio — and its owners — could be very positive indeed.

For this reason, it certainly gets my nod over Royal Mail.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »