The Royal Mail share price has been in freefall since the record peaks above 600p in 2018, falling below its widely criticised-at-the-time IPO price of 330p at the end of last year, to be trading at record lows every day this week.

None of this should have been a surprise if investors had bothered to look at the company’s forward projections for earnings, which were way too optimistic.

When Royal Mail was first floated on the stock market back in 2013, revenue expectations were for annual revenues for 2015 and 2016 to come in at £9.6bn and £9.7bn respectively, against a backdrop of a hugely competitive landscape dominated by TNT, UPS and FedEx, who can pick and choose the geographical areas that they want to cover. In actuality the revenue numbers for 2015 and 2016 didn’t come anywhere near expectations, coming in at £9.3bn and £9.2bn respectively.

Since then earnings per share have halved and those same politicians who were claiming the company was sold too cheaply aren’t being so vocal now, with the share price closing at a record low yesterday, over 33% below its IPO price.

Recent profit warnings appear to have been the final straw for a lot of investors to cash out, along with concerns about the dividend as well as fears that the company might be nationalised by an incoming Labour government. This is becoming a much more likely proposition given recent events, as the likelihood of a possible general election, increases the prospect of just such an outcome.

With respect to the dividend these fears appear to have been confirmed after management said that next year the dividend would come in at 15p a share, down from this year’s 25p.

The cut will be used to free up £1.8bn over the next five years, as it attempts to streamline its operations to operate better in an increasingly digital world.

The company’s Achilles heel has always been its letters division, where volumes have continued to plunge, and look set to continue to do so. This morning management estimated a further 5% to 7% decline in volumes over the next 12 months. There is also a lack of flexibility in being able to cut costs, amongst its highly unionised work force. The debate over costs hasn’t been helped by the furore surrounding new CEO Rico Back and his £5.8m “golden hello” last year, which in the current febrile political climate is awful optics.

The company is still profitable, and revenues have continued to rise, coming in at £10.58bn, with the main focus on its GLS operation, however it hasn’t been able to cut costs as quickly as it would have liked, with the result that profits are being squeezed quite sharply. Full year adjusted pre-tax profits came in at £398m, above estimates of £340m, but down from last year’s £565m.

Next year the company expects profits to decline further to around £300-340m, despite an expectation that revenues will continue to increase.

Given the furore over its own CEO’s pay package, management are not in a good position to start asking staff to make sacrifices, which helps to explain the cut to the dividend. Better to get shareholders absorb some of the pain along with the staff.

Staff have already seen the value of their stakes in the business fall sharply in the wake of the decline in the share price, but without wholesale changes to the cost base the business will likely continue to struggle.

 

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