James Moore: Royal Mail - to sell or not to sell?

The future looks rosy with a forecast dividend yield of six per cent
  • @TheIndyBusiness

For me, purchasing Royal Mail shares felt a bit like buying a kebab after a night out. You feel a bit guilty for doing it, and know there could ultimately be a price to pay.

But that doesn’t hold you back because it tastes really good after a skin full. Right now the paper profits from buying into the Royal Mail privatisation taste really good. 

But should you cash in and dump them now? Well there are rules for journalists who write about shares and I don’t intend to break them. But even if there weren’t I’d still be staying put despite the fact that there is a good case for bailing out now. 

As I write, retail investors like me are looking at a paper profit of just under £350. Given the way living standards are being squeezed, that’s good spending money.

There are technical reasons that suggest the Royal Mail should retain its current price for a while. The shares were clearly under priced by the Government when it sold, but demand remains strong among institutions many of which wanted stock but got left out. The company is also poised to enter the FTSE 100 later this year, so funds which track the index’s performance, will have to buy in. 

That said, people I’ve been speaking to in the City don’t expect the stock to go much higher from here. 

The representative of a big fund manager I spoke to the other day also pointed out that this is a business that faces significant challenges even though it is making good money. 

For a start, the costs of maintaining the universal postal service are high, but the real issue is the company’s relations with its workforce. 

To make the business sing, an axe will likely swing and job cuts will not go down well. My source pointed out that the growing parcel business, for example, would benefit from more automation but that inevitably means redundancies. 

The unions are already squaring up for a fight, and industrial action could quickly knock some of the gloss of the share price, and the company’s earnings. 

I’d hope that bosses would resist the temptation to indulge in macho management and proceed sensitively and sensibly, on the basis of consent. That would be in everyone’s interests, including investors. But I’m not banking on it. 

At the same time, competition is hotting up in the UK market, making the newly-privatised Royal Mail’s job even harder. 

Nonetheless, Royal Mail is profitable and tax concessions from previous losses means the tax man isn’t going to see any of it for some time.

It’s in a much better place than it was, and it doesn’t have issues with its pension fund like many previously privatised businesses because that was taken on by the taxpayer (disgraceful, but there you go). 

That parcels business is growing rapidly (six per cent a year), more than enough to offset the decline in letters. And the value of its property portfolio alone (some of which is surplus) should provide a floor for the share price. 

What really cheers me, however, is the forecast dividend yield of six per cent at the buy in price of 330p. I used some savings to buy the shares, and have no intention of spending the profit were I to sell. If the money went back into the bank, however, it would earn a pitiful rate of interest that wouldn’t even come close. 

Even if the shares settle at a slightly lower level than they are currently priced at, I’m happy to sit still and enjoy the yield until the Government sells the rest off and Deutsche Post (or someone like it) comes knocking on the door with a takeover proposal.