RBC upgrades Royal Mail, but sees little DPS upside

Analysts at RBC Capital upgraded their recommendation on shares of Royal Mail, pointing to their valuation and their improved risk/reward profile to back-up their case.

On the Canadian broker's estimates, the shares were offering a compound annual growth rate in earnings per share of -1% over 2018-20 (on a 'super ajdusted' IAS 19 basis), but a dividend yield of 5.1%.

True, with fiscal year-end 2018 net debt-to-EBITDA at 2.3, versus 2.1 for the prior fiscal year, and given the company's investment in change, RBC saw scant scope for DPS upside or for "surprises" on capital returns.

There were also the stakeholder/union issues to contend with, RBC said.

However, with the share price having come off, the risk/reward trade-off had changed.

Hence, their decision to revise their recommendation on the stock up from 'underperform' to 'sector perform', albeit with an unchanged target price of 500p.

"Our unchanged PT implies a 5% DPS yield and ~13x YA PER – in line with more traditional mail/parcel focused European postal peers, and supporting our new SP rating."