Investment Insider: What to do with your Royal Mail shares?

Investors must decide whether to keep them or take a quick profit

From a financial perspective, the flotation of Royal Mail Group appears to have been a success for investors but, perhaps, less favourable for the Government.

The aim of any flotation is to raise as much money as possible for the owners of the business – in the case of Royal Mail it would be taxpayers. Consequently, owners will want to maximise the rewards from the share sale.

The fact the shares have not only jumped by more than a third but also that the float was heavily oversubscribed suggests prospective investors might have been prepared to pay more than 330p a share for a stake in the company.

However, this was not a straightforward flotation. It was designed to not only raise money for the Government’s coffers but also to position the postal delivery company in the private sector.

Interestingly, the UK Government could be seen as laggards in privatising the UK postal service. For instance, Germany’s Deutsche Post was privatised in 2000 and Singapore Post was listed on the Singapore Exchange some  10 years ago. Both have performed well since privatisation and continue to reward shareholders with decent returns.

The question of what to do with your allocation of shares now is an interesting one. Some suggest the surge in the price is a good opportunity to take profit. After all, while a prospective  6 per cent dividend yield might seem attractive, cashing in your shares today would be equivalent to bagging several years’ worth of dividends upfront. Consequently, if your intention to participate in the share sale was to make a swift buck, then it is hard to argue against taking a quick profit now.

However, it is important to appreciate that Royal Mail Group today is materially different to the one we may remember from the past. For example, a significant portion of the regulations that made the business deeply unattractive have now been swept away. Ofcom, for instance, has decided to remove regulatory control from the price of first-class post and from most business services too. Mind you, second-class stamps will still be capped. The Government has also taken steps to bail out the Royal Mail Pension Fund by taking on both its assets and deficits.

Without that millstone around its neck, Royal Mail should be in a better position to fight for market share in a highly competitive industry, which at first sight appears to be in decline. Truth is, the internet has made sending letters almost redundant for many. However, more people are shopping online, which means demand for parcel delivery is on the rise. Let us also not forget that Royal Mail has an unrivalled distribution network and infrastructure. If it can leverage its advantage in a meaningful way there is every chance that the company has a bright future.

Deutsche Post and Singapore Post have provided Royal Mail Group with a blueprint for what is possible. Based on its most recent profit of £566m, the £4.6bn company is valued at around eight times earnings. 

The question is, can it take the next important step in its transformation or will persistent industrial action prevent the company from being a world-beating logistics company?

Knowing the answer to that should help you decide what to do with your Royal Mail shares.

David Kuo is director of fool.co.uk

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