Royal Mail Group full 2020-21 year results last week with performance well above initial expectations driven by strong parcel growth at both Royal Mail and GLS. However we are concerned that pressures could see parcel price rises in the near future.
Royal Mail Group had a cracking year with their 20/21 year ending with revenues up 16.6% at £12,638m and profits up 116% at £702m. Royal Mail parcels revenue was up 38.7% in the past year…. but parcels revenue has already dropped off 2% in April as the shops reopened and it is yet to be seen how much of this magnificent growth Royal Mail can keep in the future. Plus investors will not want to see flat revenues and profits – they’ll want to see an upwards trajectory.
We don’t quite know what the 2020-21 year holds for Royal Mail and neither does the company themselves due to ongoing uncertainty.
“As the outlook for 2021-22 contains a number of uncertainties that could significantly influence volumes and costs it is difficult to provide specific guidance for 2021-22 for Royal Mail. Instead we have provided information on costs and some sensitivities to assist in quantifying potential outcomes for the year ahead. GLS is expected to perform in line with the guidance given in March 2021. Despite this uncertainty, there are grounds for optimism. The opportunities are there. We must harness them.”
– Keith Williams, Non-Executive Chair, Royal Mail Group
As a result of this outstanding performance, Royal Mail have announced their future of the shareholder dividend. A one off 10p one-off final dividend is proposed in respect of the 2020-21 year and moving forward the dividend for 2021-22 is set at 20p per share.
And this is where we see an inkling of the trouble ahead and why we are concerned about parcel price rises. The Royal Mail Board have stated that they will not retain capital which is under utilised in their capital allocation framework so they’re not going to be building a cash war chest for the future. They’re paying 10p a share now and expecting to pay 20p a share next year. But, and it’s a big but, the growth from the pandemic has come and gone and it’s questionable if Royal Mail will ever see similar growth again.
There are two things that shareholders like – growth and profits returned as dividends. Growth of a company drives the share price up for those looking to cash in in the future, whereas dividends appeal to those who want a stable income today. However, Royal Mail costs are still up, there’s plenty of transformation left to go and the shops are open and undoubtably parcel traffic will stall.
This leaves Royal Mail to figure out where future growth and profits will come from. If they can’t maintain growth then the share price won’t be ticking up and that means the big attraction has to be dividends. If we now enter a post-pandemic slowdown of parcels then it’s a certainty that letter growth won’t replace their profits. That leaves very few levers to pull but the one certain way of boosting profits is to hike prices – and with letters largely regulated that means hiking parcel prices.
The difficulty is that hiking prices will simply see competitors take advantage to hike their own prices so this could be a knock on effect across the industry – many peg their prices to be competitive with Royal Mail so rises will give the industry more freedom.
It’s been a great year for Royal Mail who have stepped up and cashed in with a bumper set of 2020-21 year results. The note of caution regarding parcel price rises comes from questioning what they will do next.