Royal Mail Group PLC Is The Ideal Dividend Investment
By Prabhat Sakya - Monday, 18 August, 2014 | See also: RMGROYMF0
royal mailAt its most basic, investing is really about buying shares when they are cheap, and selling them when they are expensive.
Whether you are a value investor, a dividend investor or a growth investor, this contrarian principle should be at the heart of how you invest.
When Royal Mail Group (LSE: RMG) was privatised, most investors could see this company was a bargain. And so I, like many other canny investors, bought in.
A share price that rocketed
As both small investors and the institutions piled in, Royal Mail’s share price rocketed from the launch price of 330p to 570p. At which point I could see that the share price would not keep rising like this forever. So I sold.
You can’t predict the future, but you can stack the odds in your favour. When the share price has increased as much as Royal Mail did, it seemed logical to sell. But I knew I would still keep tabs on this company, ready to buy in if the share price pulled back.
And, sure enough, Royal Mail’s share price has been on a downward trend since those early share price highs. At a share price of 435p, suddenly this company looks interesting again.
Why has the share price fallen? Well, the company faces some headwinds. In particular, although the parcels business is growing steadily, it faces increasing competition from other postal companies. And the letters business faces competition through the direct delivery of letters by companies such as TNT.
Yet now might just be the time to buy back in
Yet there are also many positives: the parcel business is growing substantially faster than the letters business is declining. And there is the potential to increase its profit margins from its current 4.6% to the more typical 8-10% of its peers. Plus there is the scope to expand internationally.
Check the fundamentals and the company is very reasonably priced, with a P/E ratio of 12, falling to 11. And there is an attractive dividend yield of 4.6%, increasing to 4.8%.
This is the sort of company that should suit dividend investors down to a T, with a high and rising dividend yield, and profits, and thus a share price, which are likely to grow with time.
This company is strong, stable and generates a tonne of cash. These are the reasons why Neil Woodford has recently bought in. And why I think you should, too.
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