Royal Mail has delivered disappointing news today to the 400,000 or so private investors and employees who own its shares by announcing a cut in the dividend.
The company, which handed 913 free shares to all of its full-time employees when it was privatised in October 2013, said that, from 2019-20, it intended to pay a full year dividend of 15p-a-share.
That compares with the 25p-a-share pay-out for the 2018-19 financial year.
The decision marks something of a turnaround for the company.
Peter Long, who was Royal Mail’s chairman until he stepped down last September, told investors in last year’s annual report and accounts: “The board is committed to our progressive dividend policy.”
A progressive dividend policy is City jargon for continually raising the dividend over time.
Those shareholders have experienced mixed fortunes since Royal Mail floated on the stock market.
The shares, which were sold by the coalition government at 330p each, briefly touched 632p as recently as May last year but have since come rattling back all the way to Tuesday night’s closing price of 211.4p.
On a more positive note, as Mr Long noted in last year’s annual results, a Royal Mail employee receiving a full allocation of shares at privatisation “will have received well over £863 in dividends before tax since privatisation” – which does not include this year’s pay-out.
So what has changed?
The answer seems to be that Rico Back, who succeeded Moya Greene as chief executive in September last year, has had a chance to look at the business in detail and decided that Royal Mail now needs a greater share of the profits it generates than its owners do.
He said today: “Royal Mail is one of the most widely held stocks in the FTSE .
“The board appreciates the support of our shareholders, including our postmen and women who have received free shares.
“We very much understand the importance of the dividend to all our shareholders.
“Our decision to rebase the dividend and change the policy is not one that we have taken lightly.
“In doing so, we have sought to find the appropriate balance between investing in the future sustainability of our business and shareholder returns.”
The move does represent something of a risk to a chief executive who received a £6m ‘golden hello’ on taking the job, despite already working for Royal Mail, whose remuneration report was subsequently voted down by nearly three-quarters of shareholders at last year’s annual meeting.
Around a fifth of Royal Mail’s shares are owned by retail investors and employees.
Yet Mr Back has clearly decided there is no alternative.
Today’s results saw Royal Mail report a 14% rise in full year pre-tax profits, to £241m, on the back of growth in its parcels business and its operations overseas.
But adjusted to take account of £133m worth of so-called ‘transformation costs’, or reorganising and modernising the business, profits fell by 30% to £398m.
That left earnings per share (the company’s earnings divided by the number of shares in issue) at just 30.5p – meaning that, in the jargon, the dividend was only just covered by Royal Mail’s earnings.
It came as Mr Back unveiled plans to invest £1.8bn during the next five years in the UK’s postal service.
That money will be spent on turning Royal Mail into a ‘parcels-led business’ – with the aim of growing the volume of parcels handled by Royal Mail at more than 4-5% a year and revenues from parcels at more than a compound average of 5% a year.
UK parcel volumes grew during the most recent financial year by 8% and revenues by 7%.
Specifically, the company is planning to build three new fully-automated parcel hubs and to introduce separate van delivery for next day and larger parcels, with between of its 200-300 bigger delivery offices equipped to handle these.
It says that, with the new parcel hubs and separate van deliveries in place by 2023, it should enable consumers and small business customers in most parts of the company to receive two deliveries a day.
Other changes planned include the roll-out of 1,400 ‘parcel posting boxes’, deliveries to ‘locker banks’ and, for the first time, Royal Mail will begin collecting returns from consumers at their home.
The big question investors will have is whether the group will enjoy sufficiently strong returns on this investment.
The plan is nothing if not ambitious.
Royal Mail is hoping that, by 2023-24, 70% of its revenues will be coming from parcels.
Given the likely growth in parcel volumes, due to the explosion in e-commerce, that is certainly possible.
But it will still represent a huge change from the current situation.
The latest results show Royal Mail still to be slightly more dependent on UK letters, from which revenues were £4bn, compared with revenues of £3.5bn from UK parcels.
But letters revenues and volumes are declining rapidly, both due to the increasing migration of communications online and also to the EU’s General Data Protection Regulation, which limited the amount of marketing communications or ‘junk mail’ that companies can post.
UK letter revenues were down 6% during the year while UK parcel revenues rose by 7%.
At those rates, UK parcel revenues will overtake UK letter revenues in 2020-21.
The early verdict from the market appears mixed.
The shares rallied by 5% today, implying that the dividend cut had already been priced in, but after a 7% fall on Tuesday they still remain down by 4.5% over the two days as a whole.
But doing nothing was not an option for Royal Mail.
In the meantime, lest it be forgotten, this is no longer a solely British business.
GLS, the international arm of Royal Mail that was previously run by Mr Back before he succeeded Ms Greene, is the fastest-growing part of the company.
If Mr Back can replicate in Royal Mail’s domestic business the success that he enjoyed at GLS, shareholders will quickly forget the dividend cut announced today.