Wednesday newspaper share tips: Royal Mail

Royal Mail is a safe bet in the market, with dependable - albeit falling - revenues, The Times's Tempus said.

It is reliant on its parcels side of the business, with e-commerce offering scope for growth, while its letters business is in decline.

Nevertheless, the e-retail market is expected to continue growing at twice the rate of the high street, even if competition from Amazon for the parcel business is growing.

Investors who bought during the company’s 2013 flotation will have seen good returns for their investment, with the value of the shares increasing from its float price of 330p to £5 last summer.

The firm benefitted from Ofcom deciding against price controls in May.

Its figures for the first quarter of the year are “solid if uninspiring” depicting a generally quiet period, the tipster said.

During the EU referendum campaign the amount of political mail sent out rose, but absent those the volumen of letters fell by around 4%.

A low inflation environment poses another challenge for the firm as it limits the amount it can charge and whether its pension funds are to be closed to new members by 2018 remains unresolved.

UK parcels on the other hand showed an encouraging 2% rise in revenues and volumes. The standout was its European parcels business.

The assumption is that even though the letter market is declining Royal mail is best suited to face competitive pressures in parcels due to its substantial market share and ability to control costs.

Tempus advised existing investors to 'hold' the shares but for new investors he wouldn’t buy at present.

The rise in share price makes the dividend yield 4.2% which is less attractive than it was despite how well placed Royal Mail is in the competitive parcels market, he concluded.

The Daily Telegraph’s Questor team stuck to its ‘hold’ rating on Royal Mail as well, albeit while judging that the company was well-placed to ride out the highly competitive conditions in its main markets.

Key to the company’s outlook was the company’s sheer scale and ubiquity, Questor said.

Royal Mail’s revenues last year from its UK parcels and letters delivery businesses totalled £7.7bn, with parcels accounting for £3.2bn of that, £1.58bn of it from Europe.

In the UK it had nearly 50% of the market for parcels.

Furthermore, there was still room to cut costs, the tipster said citing third-party analysts, and the company was sitting on a “nice” portfolio of London property, so there was room to increase profitability further.

Nonetheless, the letters part of the business was nothing to write home about, facing secular decline.

Excess capacity in the market for parcels was also an issue, with Amazon.com’s decision to explore an in-house delivery system having dealt the company led by Moya Green a further blow.

Yet the forecast dividend yield of 4.7% was worth having and the stock was trading at a price-to-earnings ratio of 12.3, for a significant discount to the wider sector, Questor said. So ‘hold’, it concluded.

“Like its presence, revenues are pretty constant at £9.3bn for the next few years and Royal Mail makes a good long-term bet.”