Why Royal Mail PLC Will Be One Of 2013's Winners

It's not often that I'd expect a newly-floated company to bring handsome rewards in its first year on the market, notwithstanding the insane prices that people will pay for stuff like Twitter.

After all, they're usually sold at a price that's intended to get the thickest pocket-lining for their existing private owners rather than to give new punters a bargain.

But when it comes to the election-bribery of cheap sell-offs like Royal Mail Group (LSE: RMG), that's a different thing altogether, and I can't see any way 2013 is not going to put smiles on the faces of its new owners.

Can't lose?

After all, the shares have only been trading for less than a month, and they're already up 233p (71%) from their flotation price of 330p to 563p today. That puts the shares on a forward P/E based on forecasts for the year to March 2014 of around 12.5, with the flotation price earlier indicating a multiple of only a fraction over 7.

It was clearly priced to sell and soar.

The financial picture

For a company turning over more than £9bn a year, Royal Mail has relatively low debt of under £1bn, and with income about as close to guaranteed as it's realistic to get, that presents very little risk.

Royal Mail is great at cash generation too, so turning that accounting profit into the actual stuff you can pay the bills (and the dividends) with looks like it'll be no problem. Although the shares are on that P/E of over 12, they're trading on a price-to-cashflow ratio of only about 8 or so.

How much of that cash will be earmarked as rewards for shareholders from this mature business?

There's likely to be a dividend yield of less than 2.5% in this first year, after Royal Mail suggested it could hand back around £200m in cash for its first dividend, but the City is already forecasting a rise to 3.7% for 2015.

Those dividends should be pretty well covered by earnings too, with a cover of more than three times this year falling to a still-healthy two and a half times for 2015.

Competition?

As a customer-facing business, Royal Mail has its shortcomings -- its parcel-tracking can be almost amusingly inept compared to some, for example -- but it's a great business to be in and it still has a very big first-mover advantage. And though regulated, it's a service that's almost as essential as gas and electricity.

Admittedly it's parcel-carrying that is going to be the biggest-growing part of the service, as more and more people buy stuff online and rely on home delivery, and that's the business that competitors are muscling into.

But Royal Mail still carries 53% of all parcels posted in the UK and is by far the biggest in the business. And for smaller domestic parcels, a trip to the Post Office is still the only realistic option for most people.

And for letters, of course, Royal Mail still has a near-total monopoly.

The future

How Royal Mail's market domination is to be used will be a test of the newly-public company, and it would be easy for it to sit back and enjoy its benefits until too late. And there are also potential industrial-relations difficulties to be faced.

But with such good assets and a running start, I can see Royal Mail going on to be a winner for a lot longer than just this year -- even after the quick rise, I don't see the shares as overpriced.

(And if anyone from Royal Mail is reading, it would be great if you could get your tracking system to tell me where my parcels are before they actually arrive at my house. Thanks.)

And finally...

If you want another share that is having a great 2013, you should get a copy of the Motley Fool's Top Income Share report. It's a company that has breezed through the recession and has just kept on handing out fat dividend payments -- and it offers a very tasty 5.4% yield for the current year, after several years of paying out 5-6% and more.

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