Liberum maintains 'sell' stance on Royal Mail, dividend growth 'unsustainable'

Liberum analysts issued a damning report on shares of Royal Mail, reiterated their ‘sell’ rating on Thursday, stating that dividend growth was "unsustainable" and that the firm faces "significant" structural challenges with scant visibility on how things can be turned around, even if the sharp falls in profits across the board were “unsurprising” given an October profit warning.

The analysts did however maintain a target price of 250p eventhough earnings remain under pressure and set are to fall across the forecasted horizon.

They also pointed to cost pressures from rising labour costs, while challenges were also arising from the recently acquired GSO and Postal Express, the businesses on the US West Coast.

The GLS arm, which covers the overseas parcel business, achieved 9% like-for-like revenue growth but saw a much greater reliance on price/mix than in recent periods, they said.

In the UK, parcels and letters business UKPIL delivered a 1% fall in underlying revenue "following the failure to deliver material productivity improvements" as it failed to achieve targets of avoiding £100m in costs.

"We view the current dividend rate and policy as unsustainable, given poor cover and earnings and cash flow, and inappropriate in light of limited earnings visibility and the lack of long-term earnings growth," said a note from the broker.

The London-listed company’s dividend per share was seen as creeping up by between 0.3 and 0.4p per year even as earnings per share was forecast to drop.

Royal Mail’s shares were down 5.99% at 326.50p at 1631 GMT.