'Short-term gains trump long-term concerns' on Royal Mail shares, asserts analyst

The short-term advantages of Royal Mail shares outweigh the longer-term concerns about the value of the company, Alistair McCaig, market analyst at IG has argued.

 'Short-term gains trump long-term concerns' on Royal Mail shares, asserts analyst

The government has reported ‘strong interest’ from private investors in registering for shares in the company; McCaig told What Investment that this is mirrored by clients of his own firm.

He believes that the company promising a dividend of at least £200 million to shareholders next June is a ‘significant’ reason for this interest.

McCaig said, ‘The document released this morning estimates a market capitalisation for the Royal Mail of, at the top end, £3.3 billion. Even at the top end a £200 million dividend is an attractive yield.’

However the fact that this dividend level is promised for only one year should be a concern for long-term investors, he added. 

Elaborating on these concerns McCaig opined, ‘It may be that next June many institutional investors will, having pocketed the guaranteed dividend, then sell their shares, driving the price down.’

Whether this happens or not, he continued, will depend on ‘how the company evolves, how it deals with the unions, and how the issues around the universal service obligation and VAT are dealt with.’

These issues relate to the fact that the Royal Mail will be obliged to provide a postal delivery service to every address in the country.

Royal Mail products are also currently exempt from VAT, a situation due to be challenged in the European courts on competition grounds. 

McCaig cited this as a particular concern, but remarks that ‘it’s likely some other form of subsidy, “VAT in all but name” will be created to maintain the status quo. 

‘While the long-term concerns haven’t gone away, at the current price, they are outweighed by the short-term advantages related to the dividend. I would also point out that most initial public offerings (IPOs) offer a discount, and would expect the share price to rise by 10 to 15 per cent in the weeks after the float.’ 

Richard Hunter, head of equities at Hargreaves Lansdown, said that the share offer was expected to open later today and close on Tuesday 8 October. ‘Interested investors will need to act quickly,’ he added.

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