Royal Mail Group (LSE: RMG) released a keenly-awaited third-quarter update Thursday. But any shareholders hoping it might provide a bit of respite for the plummeting share price were, sadly, disappointed.
Since close on Wednesday, Royal Mail shares have fallen a further 8%. That takes them down 24% so far in 2020, and down 85% since the happy days of summer 2018.
The latest update was by no means all bad news, with the postal giant reporting a 3.7% rise in total revenue. As my colleague Michael Taylor points out, a cost-cutting exercise is not alone sufficient for getting a company back to profitable long-term growth. No, profits can only grow sustainably if top-level revenue is rising.
The festive season seems to have been decent too. Chief executive Rico Back said that “We had a busy Christmas season, which coincided with a General Election for the first time in almost a century.” He pointed to “additional investment and, more importantly, the commitment and dedication of our people” as the key reasons behind that success.
Profit
On the profit front, the firm says it expects operating profit of £300-340m for the year ending March 2020, before any effects from the new IFRS 16 accounting regime. That’s in line with expectations, so it’s not bad news. But it’s still a long way from any return to earnings growth, and I think we’d need to see evidence of that before the share price will start to recover.
Analysts have a 30% drop in EPS on the cards for the current year, and they’re expecting it to fall by a further 28% in the following year. That means we’re looking at a forecast P/E of 11 as far out as the 2020/21 year. And though that’s historically low, I still don’t see sufficient safety margin there.
I’m disturbed, too, by dividend forecasts. Although the dividend is set to be cut by 40% this year, I think it’s still inadequately covered considering Royal Mail’s turnaround difficulties. Yields have reached 8.7% as the share price cashes. But unless earnings start showing some serious growth soon, I just can’t see that as being remotely sustainable.
Unions
Back also said “We are disappointed that the CWU has issued a timeline for a ballot of its members for industrial action. We stand ready to invest £1.8 billion to modernise and grow in the UK. We want to reach agreement with CWU; but we cannot afford to delay this essential transformation any longer.”
And that, for me is the killer. Now, I really don’t know if the union has genuine grievances. But speaking purely as an investor, I see threats of industrial action as potentially devastating.
Royal Mail is desperately lagging behind the parcel delivery services offered by rivals. It’s not just trying to get ahead, it’s trying to catch up, and it needs a united workforce behind it. And without a recovery plan that has everyone on board, I see further financial hardship — and I place no faith in the dividend.
No, I’m not risking a penny of my hard-earned retirement pot on Royal Mail shares.
