Wednesday, 2 October 2013

Royal Mail flotation summary

The financial story grabbing the headlines at the moment is the Royal Mail flotation, so let’s take a look. Might the shares be worth buying? And how best to do so? .

I should start by apologising for my lack of new articles recently - due to working flat out on a new business over the last few months. Launch is imminent, more news shortly...


Now, onto the Royal Mail share flotation.


What’s it all about?


The Government needs cash and selling off public assets like the Royal Mail offers a fairly straightforward way of raising some. It will be selling between 40.1% and 52.2% of its stake while giving a further 10% stake to Royal Mail staff. The issue price will be between £2.60 and £3.30 per share and if both the size and price of issue end up being at the midpoints the Government will raise around £1.33 billion after costs.


Will Royal Mail shares be a good bet for investors?


On the face of it yes, at least in the short term.


A simple measure used to assess whether a company’s share price seems good value is a price to earnings ratio, or P/E. Royal Mail’s initial P/E will be between 6.5 and 8.3 depending on launch price. This makes the shares appear quite cheap given a P/E of around 15 for the FTSE All Share as a whole. And UK Mail Group, a competitor of some sorts, has a P/E of around 24% at the time of writing.


And the Royal Mail has also pledged to pay a dividend of £133 million in July 2014 (equivalent to a full year dividend of £200 million), which would equate to an income yield of between 6.1% and 7.7% - again very attractive versus peers. Based on current earnings this appears to be a sustainable rate (it represents roughly half earnings).


But, of course, life is never that simple. There are risks. In the very short term expect lots of staff unrest and industrial action, as in private hands Royal Mail will look to aggressively cut costs. It will also find maintaining the Universal Service Obligation (in simple terms, delivering a letters six days a week to every UK address with uniform prices) a drag, especially in the face of falling letter volumes. Higher parcel volumes (thanks to Internet shoppers) could compensate, although Royal Mail faces stiff competition in this sector.


On balance, the shorter term outlook looks quite favourable thanks to a seemingly low issue price range and very attractive anticipated dividends. But moving forward a few years things could start to get choppier – and some of us will likely get the hump as the Universal Service Obligation is inevitably watered down.


How much can I invest?


Since the share price will not be known until after the application deadline, investment amounts are fixed as follows: £750, £1,000, £1,500, £2,000, £2,500, £3,000, £4,000, £5,000, £6,000, £7,000, £8,000, £9,000, £10,000, £15,000, £20,000, £25,000, £30,000, £35,000, £40,000, £45,000, £50,000 and £10,000 increments thereafter.


If oversubscribed, he the issue will be scaled back, so you may receive fewer shares (and of course invest less) than expected.


The Timescale


If you want to buy shares you’ll need to apply by 8 October. The share price and size of issue will be announced on 11 October and formal trading on the London Stock Exchange will commence 15 October.


How to buy


You can buy shares either via the Government’s own service or a third party stockbroker. Either way, there are no purchase costs nor stamp duty. However, the route you choose could have potentially big cost implications while you hold the shares and/or when you sell.


The Government

This service is provided by Equiniti and shares will be held in its nominee account unless you opt for a certificate. There is no option to hold within an ISA or pension. While there are no charges for holding the shares, the sting in the tail is potentially high charges when you come to sell when using the nominee account – whichever of the 4 options you use:



  1. Sell online: 1% with a minimum £17.50.

  2. Sell by phone helpline: 1% with a minimum £25.00.

  3. Sell by phone automated service: 0.75% with a minimum £7.50.

  4. Sell by post: 0.75% with a minimum £7.50.

However, even if you do buy via this route and face a potentially high charge for selling, all is not lost. You can transfer to another broker’s nominee account for £10, although this involves some paperwork, a wait of up to 2 weeks and potential fees charged the new broker.


If you opt for a share certificate you can sell through whoever you choose, but most brokers tend to charges upwards of £40-50 for this.


Other brokers

There is a long list of other brokers through whom you can buy the shares instead (see here). You won’t pay a fee to buy, but any usual account fees and dealing fees when selling will likely apply. In terms of pure cost, the one that stands out is x-o.co.uk, since there are no account fees and a dealing fee of just £5.95 to sell (at time of writing).


Can I buy within an ISA or SIPP?


Yes, provided you have an ISA or SIPP account with a participating stockbroker containing enough cash to fund the purchase by the 8 October deadline.

Read this article at http://www.candidmoney.com/articles/274/royal-mail-flotation-summary

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