2020 has been a transformational year for Royal Mail (LSE: RMG) shares. I’ve turned bullish on the stock and would buy it now. In fact, I’d even suggest the company as my top pick for April.
Earlier this week, Royal Mail released a pre-close announcement before its full-year 2020/21 results on 20 May. This statement highlighted some key points that I reckon are worth commenting on.
One-off dividend
I think it’s worth mentioning that the online shopping boom during coronavirus lockdowns has fuelled Royal Mail’s stellar growth in parcel deliveries. Due to this, the company has upgraded its revenue and profit guidance for 2020/21.
But the icing on the cake is the announcement of a one-off dividend of 10p for the year. It has also said that it will be announcing a new dividend policy on 20 May.
I like that the management team is shareholder-friendly and has distributed some of the profits through a special income payment. I guess it has rewarded investors who have been patient with the challenges that the company has faced over the last few years.
But what I think is pleasing to see is that Royal Mail will be addressing its current dividend policy. This keeps income-hungry investors, like me, happy. I can only speculate that it may reinstate its full dividend. I’ll have to wait and see on that.
I’d buy Royal Mail shares with the one-off income payment and the new dividend policy being signs of good things to come, I feel.
Trading guidance
As I mentioned, Royal Mail increased its revenue and profit guidance for 2020/21 earlier in March. But these aren’t just small upgrades, they’re chunky uplifts.
The company now believes full-year revenue will rise by £900m year-on-year compared to the previous £380m-£580m rise it expected. It also indicated that operating profit would be £700m compared to guidance of £500m+.
GLS
I think Royal Mail’s GLS unit is the jewel in its crown. This division focuses on deliveries to international regions such as Europe and North America. The strategy for the Royal Mail brand is transformation, but with GLS it’s about capitalising on growth in key markets.
In its pre-close announcement, the company indicated that it expects GLS’s revenue between 2019/20 to 2024/25 to grow at a compound annual growth rate (CAGR) of 12%. It also reckons GLS can double its operating profit to €500m and generate €1bn of free cash flow over the same period.
I think these are very impressive targets. And if delivered, could increase Royal Mail shares from here.
Risks
While the pandemic has worked in Royal Mail’s favour, there’s no guarantee this level of parcels volume will continue, especially in a world after Covid-19.
Royal Mail has delivered some ambitious goals for its GLS unit. Any delays or setbacks, are likely to impact the share price. The company has delivered a one-off dividend too, but there’s no assurance that income payments going forward will be attractive for investors.
Yet I think Royal Mail’s transformation has been spectacular so far and I expect it to continue. I’m bullish on the stock as a long-term investor and I think the company is only getting started.
