Should you buy shares in Royal Mail?

The Government has revealed its plans for privatising Royal Mail by selling shares in the business.

To encourage take-up of these shares, the public has been invited to apply via a Retail Offer. However, the last date for applications for shares is 8th October, so you don't have long to apply.
Royal Mail for sale
The Government only took two weeks after announcing that it was going to proceed with an initial public offering ('IPO') of Royal Mail before unveiling the details. Here they are:
  • The shares are expected to be offered for sale within a price range of 260p to 330p a share.
  • Royal Mail will have one billion shares, valuing the postal operator at between £2.6 billion and £3.3 billion.
  • The Government expects to dispose of the majority of its holding.
  • A tenth of the shares (100.16 million in total) will be handed free to around 150,000 eligible UK-based Royal Mail employees (out of a total workforce of 167,000).
  • These free employee shares will be worth between £260 million and £330 million, making this the largest allocation of free shares of any major UK privatisation.
  • Between 401 million and 521.7 million shares will be offered for sale, representing between 40.1% and 52.2% of Royal Mail's share base.
  • Following the offer, the Government's holding in Royal Mail is expected to be between 37.8% and 49.9%, so it will have no majority 'golden share' in the company.
  • If demand for the shares is high, an 'over-allotment option' can be exercised, allowing an extra 60.1 million to 78.3 million shares to be offered for sale.
  • If the over-allotment option is exercised, then the Government's shareholding could fall to as little as 30%.

As well as offering shares to the public via the Retail Offer, the State will sell large chunks of Royal Mail to foreign and institutional investors, including pension funds, asset managers and insurance companies. These investors are expected to grab around 70% of all shares up for sale.

How you can buy shares
If you're interested in buying a stake in the Royal Mail then you need to act quickly.

For private investors, the minimum investment is £750, which will get you between 227 and 288 shares, depending on their final price. For eligible Royal Mail employees applying via the Employee Priority Offer, this minimum investment falls to just £500. Postal workers also get priority on share applications up to £10,000, subject to an overall limit.

The Retail Offer has already opened, so you can apply now via your usual stockbroker or share-dealing service. You can also apply by post, via Post Offices (application packs will be available in 1,500 Post Offices nationwide from 30th September), or online.

Whichever route you take, please make sure that your application is received by 8th October, or you'll lose out. The pricing announcement and conditional dealing in Royal Mail shares is due on 11th October, with full trading commencing four days later on the 15th October.

For more information (without advice on whether you should buy the shares or not), you can call the Retail Offer helpline on 0330 123 0147.

Why own part of Royal Mail?
Investors buy shares primarily for two reasons. First, to make capital gains as businesses lift their profits and share prices over time. Second, to collect a cash income from the regular dividends many companies pay, usually quarterly or half-yearly.

While it's impossible to predict the future business success and profitability of Royal Mail, what is clear is that, thanks to a juicy dividend, its shares are sure to become popular with income-seeking investors.

According to its prospectus, Royal Mail's implied yearly dividend yield for the year to 31st March 2014 would be between 6.1% and 7.7%. When compared to the yearly interest of, say, a mere 2% paid by top savings accounts, this is a mouth-watering yearly income. Then again, cash deposits are entirely safe and Government-protected, while shares are much riskier, volatile investments.

With Royal Mail expected to pay dividends initially totalling £200 million a year, its shares are sure to be snapped up by income funds. As a result, this could lead to an early 'bump' in its share price, producing instant profits for private investors.

In addition, as it will soon be one of the UK's largest listed companies, Royal Mail could well join the FTSE 100 index of elite, blue-chip business at the next FTSE review in December 2013. Again, this will boost demand for its shares from FTSE 100-tracking funds.

I will probably buy
Before investing in any venture, I first ask a couple of simple questions. Are its earnings sustainable? And how will they grow?

Although Royal Mail has been around for almost five centuries, postal revenues have slumped over the past two decades as electronic communications and internet usage has boomed. With turnover from universal postal deliveries expected to decline further, this is a negative for Royal Mail, its future market value and share price.

On the other hand, thanks the huge boom in online shopping, parcel revenues have surged strongly. This growth area of the business will help offset future declines in traditional postal revenues.

In 2013, Royal Mail will deliver almost all UK letters (a 99% market share) and over one billion parcels (a 53% market share). In its latest financial year, revenues were up 5% to £9.3 billion, boosted by a 13% rise in parcel revenues. Operating profit (stripping out exceptional costs) more than doubled to £440 million, with over a quarter of this (27%) coming from outside of the UK.
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