Royal Mail to pay one-off divi, plans doubling GLS profits by 2025

(Sharecast News) - Royal Mail said it would pay a one off dividend and held full-year profits guidance as it planned to double profits at its parcels division as Britons shifted to online shopping during the Covid pandemic.
The letter and parcels delivery company will pay shareholders 10p a share after reporting a rise in volumes earlier this month due to a surge in parcel deliveries from online shopping during the Covid pandemic.

Annual group adjusted operating profit is still expected to be around £700m, while GLS adjusted operating profit was forecast to be around £350m and adjusted operating profit margin 8.7%.

Ahead of an update on medium-term targets for the GLS business, including a focus on business-to-consumers, the world's oldest letter carrier on Tuesday said it would increase operating profits to €500m from 2019-20 - 2024-25, grow revenue at around a compound 12% from €3.6bn in 2019-20) generate €1bn of free cash flow.

The board expects to announce a new dividend policy for the group with FY2020-21 results on May 20, the company added.

Royal Mail raised its annual profit forecast on March 10, citing stronger-than-expected advertising, business and stamped mail volumes this year.

In February it forecast annual profit ahead of market expectations as Covid-19 restrictions pushed parcel delivery demand to record levels and Christmas mail eased a slide in letter volumes.

Richard Hunter, head of markets at interactive investor, called Royal Mail's turnaround "astonishing" as the momentum of bumper Christmas trading has spilled over into the new year.

Royal Mail posted adjusted operating profit of £325m a year ago, with the boom also assisted by better than expected volumes at its ailing letter business, "where the inexorable rise of online activity has led to physical cards and letters being the subject of terminal decline" he said..

"The restructuring charge is also likely to have improved, now estimated at £90m as opposed to the £140m originally envisaged, while the international GLS business remains the hub of growth."

However, Hunter warned that challenges remain for the group, with competition "particularly fierce in the parcels business and it is not yet clear whether the current volumes are at a temporary peak as customers have been driven to online shopping from their homes during the pandemic".

"Along the way, it has been nothing short of a rollercoaster ride for investors. From the initial float price of 330p in 2013, the shares peaked at 630p in May 2018 and then troughed at 124p in April 2020."

The shares have risen by nearly 290% to the current level of around 510p, as compared to a rise of 47% for the wider FTSE250 and Hunter suggested the stock would be a "strong contender to regain its FTSE100 status at the next reshuffle".

"The company is currently being cheered from the sidelines by investors, with the market consensus having done a complete U-turn over the last year, now coming in at a strong 'buy' on prospects," he said.