Special dividend delivers for Royal Mail (RMG Stock) share price

The Royal Mail share price has struggled since its Q1 update back in July saw group revenue rise by 12.5% compared to last year, and by 20.5% compared to 2019.

While on the face of it these numbers were solid, the parcels division saw a 13% slowdown in volumes as shops started to reopen, although these numbers do need to be set in the context of last year’s lockdown when comparatives were much tougher due to everyone being at home.

Revenue on the other hand was higher, with the company reiterating its full year guidance.

In September, the outlook remained the same, with a marked slowdown from the numbers in Q1, with domestic parcel volume declining 5% year on year.

That said revenues for the group were 8.2% higher year on year, and up 17.7% from 2019, and even though this was a significant slowdown from the numbers in Q1, the biggest concerns appear to be around rising costs.

Today’s H1 numbers showed revenues in line with expectations at just over £6bn, a rise of 7.1%, with group adjusted operating profit coming in at £404m, which was just above the guidance issued back in September of between £395m to £400m, while operating margins improved to 6.7% up 600bps from a year ago.

Royal Mail saw revenues rise by 6.4% to £4.07bn, with letters and domestic parcels helping to drive that number. Revenues at GLS rose 7.5% to just over £2bn. Parcel volume saw a rise of 33% vs pre-pandemic levels but were 4% lower from the same period a year ago.

Profits before tax rose to £315m up from a £17m profit from a year ago.

With the improvement seen over the past 12 months Royal Mail has said it will be returning £400m to shareholders, £200 in the form of a share buyback, and £200m in the form of a special dividend. This is exactly the sort of special delivery that shareholders tend to welcome. This would be alongside the interim dividend of 6.7p per share, payable on 12th January 2022.

In respect of the outlook and the upcoming Christmas period Royal Mail says it expects to see adjusted operating profit come in at £500m, with operating margins expected to increase to 8%, although it warned that GLS could see significant cost headwinds which could see lower revenue growth in H2, compared to H1. This ties in with the guidance of £500m for full year operating profit given that Royal Mail has already reported £400m in H1.

Operating costs continue to be a challenge, rising by £73m during the first half, a theme we’ve already seen that with FedEx in the US who have had to increase wages for new hires, while management have warned that the increase in NI contributions next year will add another £50m to its costs, while also warning of further costs of £40m in FY2022/23 due to a shorter working week for its staff.

To offset this the company has identified another £190m in cost savings, through increased automation and other measures.