It’s no surprise to hear people, and especially politicians, bleating on about how Vince Cable could have sold the Royal Mail for more money. With the benefit of hindsight, the Government probably could, but it is a very fine balance. When the range of £3.00 – £3.30 was initially touted as a price for the shares – based on the opinions of a lot of experts (well, greedy merchant bankers mostly) – there wasn’t too much talk around that the shares were going to be under-valued. If the IPO had been set at say £4.00 it may well have frightened off many City Institutions given that there isn’t a lot to compare the Royal Mail with. If there had been hints that the share sale was likely to be a flop, then most, if not nearly all the people who subscribed, probably wouldn’t have bothered and it would be a self-fulfilling prophecy.
If politicians were actually bothered about the share sale then perhaps they should have made a bit more noise when George Osborne took out the £9.5 billion pensions deficit! He has now effectively got a couple of £billion back for – which is not a great deal in anyone’s language.
The share price is now about £5.00 but as to whether it is worth this much is anyone’s wild guess. When the shares were ‘sold’ at £3.30 at least they had an attractive dividend of 6% and this is really VERY attractive when interest rates on deposit accounts are barely worth the effort of filling out forms year after year to prevent being dropped to the standard 0.0001% that you get on most bank’s non ‘special’ rate. The divi is the one attractive proposition in the shares but, in a business in decline, the dividends are not guaranteed to stay high… there are lots of problems on the horizon…
The amount of letters being sent each year is declining by about 6%. The parcels business is highly competitive with the Royal Mail having to compete with companies who are years ahead of them. The Royal Mail doesn’t have to pay VAT – well not yet! If it has to some time in the future then they would have to raise their prices to absorb this. And finally there is the strike action – the longer that goes on, the more damage there will be to the share price. All these are threats to the dividend payout further down the line – and in any case, the dividend yield now that the share price of £5.00 is a far less attractive 4%.
The only other thing the Royal Mail has got going for it are the huge assets in Central London and other cities, although it is hard to see how they could realise the value of these without moving to the lower cost centres outside the cities, This will then increase the cost of delivering to most of their customers.
Holding on to the Royal Mail shares in the long term is not a low risk proposition but could still be worth holding if you are fully aware of the many potential problems in the years to come.