More of the same from Royal Mail (RMG) with good growth in parcels and GLS while letters are in freefall decline: yet more evidence of the structural problems it faces as it heads into the key Christmas trading period. Whilst letters weigh, parcels look solid, GLS is strong and the dividend yield certainly looks attractive.

First, UKPIL revenues were flat in the first half, after a 1% fall in Q1 and falling 2% in 2016/17. Parcel revenues rose 5%, boosting UKPIL revs by 6%. But parcels remains a highly competitive business and RM is not as agile as some smaller rivals. With relatively high fixed costs Royal Mail’s parcel business may not be best placed to weather a pullback in volumes if economic uncertainty dampens consumer demand.

Letter revenues declined 3%, which was less than expected. But Royal Mail can thank Theresa May’s rash decision to call a snap election for that as better than expected revenue performance was principally due to election mailings. Addressed volumes were down 5%.

Royal Mail expects letter volumes to fall by about 4-6% a year in the medium term. Increased digitisation efforts on the part of banks and government may see this accelerate.

As ever, it all hinges on Christmas but like the rest of the letters market, Christmas cards are ex-growth. The rapid decline may have slowed as consumers realise Christmas emails are not all they’re cracked up to be and increasingly go upmarket, but broadly speaking this is about managing the decline in volumes.

GLS remains the star performer as Royal Mail continues to lean heavily on its overseas operations for revenues. Revenues at GLS rose 9% on 9% higher volumes, helping Group revenues to rise 2% for the first half, up from 1% growth in Q1.

Meanwhile labour negotiations hang over the stock. The update notes dryly that ‘the industrial relations environment could impact our performance in the second half. It’s so far avoided a Christmas strike (which would be disastrous) but concessions mean higher labour costs eating into profits.

Funds have been steadily building up short positions this year with about 3% now short versus c1% in January 2016. But with RMG -22% for the last 12 months to yesterday's close, there could be upside from a broadly positive outlook on GLS and parcels.

Reported after tax profits of £168m – double the £87m last year - mean it’s still highly cash generative and can afford a progressive dividend (interim dividend +4% to 7.7p from 7.4p last year) that’s yielding more than 5%. If the final dividend also rises 4%, the yield would be more than 6% based on where the stock closed last night. Shares have opened up +4%. 

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