Royal Mail to slash dividend 40 per cent as profit drops by a third
Royal Mail said today it will cut its dividend 40 per cent from next year as it earmarks extra cash to invest in the business.
The figures
The company today announced a drop in operating profit of 34 per cent.
It said operating profit after transformation costs for the 52 weeks ended March 2019 was £376m, compared to £581m for the same period last year.
Royal Mail shares were up 6.1 per cent at 224p this morning, having plunged earlier this week on fears of a dividend cut.
Royal Mail said it would pay a dividend of 25p per share, up from 24p per share last year.
However, it said from next year it would"re-base" its dividend at 15p and change its dividend policy.
The new policy from 2019-20 is for a full-year dividend underpin of 15p per share, which may be supplemented by additional payouts in years with substantial excess cashflow.
It said the policy "reflects the additional investment to turnaround and grow our UK business and expected lower cash generation in the early years of the plan".
Revenue for the 52 weeks ended March 2019 was £10.4bn, compared to £10.1bn in the same period last year.
It grew parcel volumes eight per cent and parcel revenue seven per cent, but this was offset by an eight per cent decline in letter volumes and a six per cent decline in revenue.
The company said it aims to refocus its business around parcels and grow its international arm.
It said transformation costs were £133m last year.
Why it’s interesting
Royal Mail has taken a hammering in the stock market recently, falling out of the Ftse 100 last year. There had been intense speculation that Royal Mail would cut its dividend today amid falling profits and an attempt to turn around its business.
It said today it would invest a further £1.8bn in its UK postal service over the next five years in the hope of turning its business around.
In the short term it continues to predict decline, with a forecast of adjusted operating profit of £300m to £340m for 2019, below the £376m reported for the 12 months to March 2019.
Adam Vettese, an analyst at Etoro, said: “After a disastrous 2018, which saw Royal Mail Group fall out of the Ftse 100 in December 2018, the company has continued to underperform with its share price down over 60 per cent since its peak in May last year.
“Intense competition is piling the pressure in terms of parcel deliveries with the world becoming increasingly more digital and tech heavyweights entering the delivery space, providing a much cheaper and quicker service. Is traditional snail mail on borrowed time?”
Nicholas Hyett, Equity Analyst at Hargreaves Lansdown, said: “Royal Mail wasn’t under any immediate pressure to slash the dividend, with the balance sheet still relatively unburdened with debt even if cash flow has deteriorated dramatically. Given the importance of the dividend to many of Royal Mail’s shareholders, the decision to cut can be taken as an indicator of the severity and long term nature of the challenges the UK’s postman faces.
"Declining letter volumes aren’t really a surprise, even if Brexit and GDPR has made them worse than expected, instead it’s ongoing cost pressures in the UK and Europe that’s the real killer. Potential cost savings was one of the major reasons to buy the shares back when the group listed, but the low hanging fruit is largely gone and getting leaner is going to be harder from here.
"CEO Rico Back’s turnaround strategy focuses on automating the group’s sorting offices and increasing focus on the overseas division that he ran for years. They’re sensible moves in themselves, but will demand significant capital investment and that lies behind the dividend cut."
What the company said
Chief executive Rico Back said: "Our ambition is to build a parcels-led, more balanced and more diversified international business, delivering adjusted group operating profit margin of over four per cent in 2021-22, increasing to over five per cent in 2023-24."
"At the heart of our refreshed strategy is a UK 'turnaround and grow' programme. In 2018-19, after a challenging year, we delivered productivity improvements and cost avoidance in line with our revised expectations. Over the next five years, through a focus on new ways of working and extending our network, we will ensure a contemporary UK universal service.
"The investment in the UK, and expected lower cash flow in the early years, means we are rebasing the dividend and changing our dividend policy. This is not a decision we have taken lightly as we know how important the dividend is to our shareholders. We have sought to find an appropriate balance between sustainable shareholder returns, and investing in the future."