Royal Mail PLC (RMG): Growth In Europe And US Offsets Weakness In UK

High-yielding income stock Royal Mail PLC (LON:RMG) was one of the few that showed strength amid a bearish mood in global equities this Thursday, triggered by concerns over Washington’s ability to execute its plans.

RMG, which currently pays more than 5% in dividends, shareholders had a lot to feel good about as the postal services reported a 25% jump in pre-tax profits to £335 million for the fiscal year ended Mar’17.

With logistics businesses facing a downturn in the UK, RMG’s UK business, which accounts for nearly 80% of group sales, saw a 2% contraction in the top-line. But, this was offset by 9% growth of the company’s business, Global Logistics Services (GLS), in Europe and the US.

“GLS is performing very well and is growing revenue organically and through acquisitions. Its deep expertise and focus on B2B parcels in multiple geographies – now 41 European countries and seven states in the US – positions it to be a greater force for growth for the Company”, said CEO Moya Greene in a statement Thursday.

Maintaining a progressive dividend policy

“Through a combination of our strategic approach to costs and more efficient investment spend, we will support our progressive dividend policy with the in-year trading cash generation of the Group”, she added. Proposed full-year dividends stood 4% higher at 23.0p per share.

LSE-RMG Historical Dividend Yield by Simply Wall St

Despite operating profit rising just 1%, the strong growth in the pre-tax profit was due to the lower transformation costs compared to the last fiscal — and it’s showing an impact as reflected in the company’s processing and delivery productivity improvement of 2.7%.

In addition, what further lends support to dividend sustainability is the fact that the company is past its peak investment and is on track to reduce £600 million, during 2017–18, out of its annual costs in the UK business.

One of the most important factor that decides the company’s ability to continue to payout dividends is its in-year trading cash flow, which stood at £420 million for this fiscal, compared to last year’s £254 million.

All is not so good for shareholders

The company is currently pursuing a review of its pension benefit scheme, which has proven unsustainable with wiping out surplus to pay them and RMG’s cash contribution set to rise significantly from the current £400 million.

In its ongoing negotiations, indicating no easy resolution soon, with two labour unions, CWU and Unite/CMA, there hasn’t been a consensus on RMG’s proposed defined benefit cash balance scheme, which will absolve it from taking the huge liability of maintaining benefits that amount to more than £1 billion.

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