Investment Thesis
Royal Mail Group (OTCPK:ROYMF) is a very well-respected and trusted brand in the United Kingdom. Furthermore, as a result of having officially been part of the UK government for almost 497 years, it continues to take advantage of the infrastructure that was established on its behalf during this period and also the confidence that has been built up in its services over the centuries. This fact, combined with the company’s innovative attitude since being privatised suggests that the group is a great investment for anybody with a long-term mindset.
A National Institution
All Royal Mail stamps still consist of an image of the Queen. This may seem trivial, but it certainly begins to demonstrate that Royal Mail has maintained its link with the state, albeit with the added benefits of being a private company.
One way in which this link with the government is useful is the fact that Royal Mail is embedded into the laws of the country. For example, the Electoral Commission entitles candidates in British parliamentary elections to mail a manifesto leaflet to local voters, free of charge. Who is the company statutorily responsible for posting these campaign mail-outs? Royal Mail, of course! Additionally, government agencies almost exclusively use Royal Mail for official purposes. The Home Office, for example, uses Royal Mail to securely post passports and other documents to their owners.
This dependence of the government on Royal Mail will ensure steady profits for many years to come, even if letter volume as a whole is falling. Royal Mail was the company traditionally used before it was privatised and the government currently has no reason to change to an alternative and potentially untrustworthy postage provider.
It’s not just the state which depends on Royal Mail. Companies in the UK are also very aware that the facilities offered by Royal Mail (e.g. letterboxes all around the country) allow their customers to contact and transact with them more easily. Many companies have even purchased “Freepost” addresses to enable customers to contact them without having to pay for postage.
No Lack Of Innovation
Despite having previously been part of the infrastructure of the UK government, there is no lack of innovation within the culture of the newly privatised Royal Mail. The company recently announced that it would be deploying electric trucks and vans across the whole country in order to reduce its carbon footprint. It’s also investigating the use of letter boxes for posting parcels. One application of this would be that online sellers would no longer have to visit a Post Office in order to post their products to customers. They could instead choose to post them at a network of more than 100,000 postboxes around the UK (another example of the vast infrastructure owned by Royal Mail as a result of its past links to the government).
The company has also shown its innovative side by developing partnerships with large postal carriers around the world and has worked with these partners (which include USPS and Japan Post) to allow items sent abroad through their network to be tracked and monitored – even when the items are overseas.
Powerful Dividend
Companies in the UK typically do pay higher dividends than those in the US and Royal Mail is no exception. An added bonus of buying shares in Royal Mail is that the company currently has a dividend yield of 8.66%, partially due to its currently depressed share price – some have attributed this to temporary Brexit uncertainty.
ROYMY Dividend Yield (NYSE:TTM) data by YCharts
Low Valuation Based On Fundamentals
Royal Mail has a price-to-earnings ratio of just 10.83x, low when considered alongside the wider UK market with P/Es closer to 14x. The company also has a price-to-book value of 0.63, meaning that it is trading at less than asset value, and that there is therefore a considerable margin of safety were anything to go badly wrong with the company in the future. The company’s balance sheet also shows that it has very low levels of debt and a healthy amount of cash which it can use to fund further research and development.
Conclusion
When buying shares in Royal Mail you are effectively buying a stake in a UK government agency (although really you are buying shares in a private company). The fact that the government is so dependent on Royal Mail as a result of their historical relationship means that Royal Mail is an excellent investment opportunity over the next 5-15 years and I would certainly promote the idea of establishing a position in this British company.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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