Buying a company that has roots back to 1516 AD

Royal Mail plc (RMG.L)

Who are they:

Royal Mail  is a postal service and courier company in the United Kingdom, originally established in 1516. The company's subsidiary, Royal Mail Group Limited, operates the brands Royal Mail (letters) and Parcelforce Worldwide (parcels). General Logistics Systems, an international logistics company, is a wholly owned subsidiary of Royal Mail Group.

The company provides mail collection and delivery services throughout the UK. Letters are deposited in a pillar or wall box, taken to a post office, or collected in bulk from businesses. Deliveries are made at least once every day except Sundays and bank holidays at uniform charges for all UK destinations. Royal Mail generally aims to make first class deliveries the next business day throughout the nation.

For most of its history, Royal Mail has been a public service, operating as a government department or public corporation. However, following the Postal Services Act 2011, a majority of the shares in Royal Mail were floated on the London Stock Exchange in 2013. The UK government initially retained a 30% stake in Royal Mail, but sold its remaining shares in 2015, ending 499 years of public ownership. It is a constituent of the FTSE 100 Index.

How did i find them?

I was chatting to my postman the other day and he was mentioning that he was buying some more shares as the price is so low. I asked why they were so low and he explained about the company floating 5 years ago and all employees got free shares . But they could not cash in the shares until they have held them for a least 5 years to avoid tax. "Some 145,000 postal workers have waited five years to sell the free shares they were given at the time of privatisation without being taxed" - BBC.  Now the five years is up employees were selling when the price was at the top and now its dropping they are panicking as they think they are losing money so they are also cashing in. 

I asked how he felt about the company. He explained that everything seems really good, plenty of work, good working conditions and they are getting a new vehicle roll out. Thats another reason why he was adding to the low price shares. The company peaked in May this year at 632p and has nearly halved at 336p.

Company downside:

One of the main factors that puts it at a disadvantage to other couriers is that it there is alot of manhandling and alot of people on the payroll. They also have a duty to visit every house in the UK at no additional costs  on a letter price if its a letter. All this makes Royal mail one of the most , if not the most expensive ways of sending a parcel.

Royal mails core revenue used to be the delivery of letters but this is and has been diminishing over the years. 

With these high running costs the lastest earnings have tumbled. Pre-tax profit more than halved to £33m for the six months to 23 September despite a 1% rise in revenues to just over £4.9bn.

Revenue from its GLS European parcel operations was up 9%, offsetting a 1% fall in the UK parcels and letters. While this does not initially look good most of the downside was due to the fall in letter deliveries. Other sub core areas have been expanding.Growth in online shopping helped drive a 6% rise in revenues for the UK parcels business, but total revenue from letters was down 7%. Adjusted pre-tax profit was down 27% to £183m.

The Numbers:

Market Cap : £3B     

Current Market Value: £3.27  Future cash flow value: £4.49

P/E :34.6                                Expected annual growth in earnings : 15.2%

Debt : 16.7% (and is well covered by operating cash flow)

Dividend :7.33%

Whilst this is a very old company the dividend have only been paid out for the last 4 years and the dividends have been increasing. This short period is because that the company only fully floated 5 years ago.

Reasons for buying:

This is a very well established company with an amazing brand  and an ever increasing market. While letters used to be their core component the future is in parcels and counter services (money transfers, important document transfers eg driving license, passports. ) plus its expansion of  General Logistics Systems (GLS) across Germany and Europe . Not only does this company have the edge in providing a 100% UK coverage but it also provides a face to face counter service, last minute delivery and an expanding services growth sector both in the UK and other countries. 

This is a one of a kind company in the UK that has held back its competitors. The dividend has been increasing YOY  .The expansion of Royal Mail’s GLS division looks set to continue over the medium term. It seems to be gaining traction in existing markets and could help to offset the decline in Letters volumes in the UK.

Conclusion:

For me this has long term growth potential with a steady dividend income stream that is at a 5 year low in over sold conditions.

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