Last week, Royal Mail (LSE: RMG) published its trading update for the first nine months of the company’s financial year. It didn’t go down well.
After Royal Mail told investors it expects operating profit for the year ending March 31 of between £500m and £530m, below management’s previous forecast of £500m to £550m and significantly below last year’s adjusted operating profit of £694m, the stock plunged nearly 15% in a single day. Following these losses, the stock is off more than 44%, excluding dividends, over the past 12 months.
I hate to say it but, unfortunately, I don’t think there’s a quick solution to Royal Mail’s problems, and there could be more declines ahead for investors.
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Shrinking market
The way I see it, Royal Mail has two main problems. First of all, the number of letters being sent across the country is declining and that decline is only accelerating. Last week’s update informed investors that letter volumes are on track to decline by as much as 8% this financial year, above the company’s targeted range of 4-6%.
Second, Royal Mail must continue to provide a regular postal service to all households across the UK. So, they can only cut costs by a certain amount.
Looking at these two factors, it seems to me as if the business is stuck between a rock and a hard place. Sales are falling, but the business cannot be as aggressive on costs as perhaps management would like to be.
An increase in the number of parcels being delivered, as well as Royal Mail’s international business, is helping to offset some of the declines, although as the recent update shows, growth here isn’t enough.
Considering all of the above, I think it could be time to sell the Royal Mail share price. The company is facing an uncertain future, and while a dividend yield of 9.5% might look attractive, falling profits don’t fill me with confidence that this distribution is sustainable.
Personally, I would rather invest my money in property than the Royal Mail share price, which is why I would buy shares in New River Retail (LSE: NRR) instead.
Avoiding the pain
Investors seem to be just as worried about New River’s future as they do about Royal Mail’s, and it is easy to see why. The company has a huge commercial property portfolio, leaving it exposed to the struggling UK high street.
However, I’m not as pessimistic about New River’s outlook the rest of the market seems to be. Yes, the group does have significant exposure to retail property but, so far, the company seems to be coping quite well.
In its third-quarter update, published a few weeks ago, New River revealed that its portfolio occupancy was 95.5% at the end of 2018. Some 119 leasing deals were signed during the quarter, with an average rent per square foot of £14.61, up from the previous figure of £13.14 per sq ft.
These figures tell me the company is outperforming in a tough market and, this being the case, I think it’s worth buying into New River’s highly attractive dividend yield, which currently stands at 9.3%. The stock is also trading at a discount of more than 20% to it published net asset value, providing a healthy margin of safety if asset values should suddenly slump.
