9.3% dividend yield! Should I buy Royal Mail shares for the BIG dividends?

Britain’s oldest courier has its fair share of problems today. But Royal Mail (LSE: RMG) shares remain ultra-popular, and particularly so with dividend investors.

Last year, the business doubled the full-year ordinary dividend to a chunky 20p per share. It also used its impressive cash reserves to pay a 20p special dividend and launch a share buyback programme.

Chunky dividends

Now Royal Mail has no plans to pay any more one-off rewards. However, the large ordinary dividends City analysts are expecting still create hugely attractive dividend yields.

Projected payouts over the next couple of years are expected to lag last year’s levels. For the years to March 2023 and 2024, total dividends of 17.8p and 19.4p per share respectively are expected.

However, Royal Mail’s share price slump in 2022 means these payouts yield an excellent 8.5% and 9.3%. To put this in perspective, the broader FTSE 100 average sits just below 4%.

The question is, do these big yields make Royal Mail shares a buy?

Two big things to consider

Right now, Royal Mail faces two colossal risks that are encouraging me not to invest. These are:

1. Continuing industrial action

Royal Mail remains deadlocked with the Communication Workers Union (CWU) over the issue of workers’ pay. No progress here raises the prospect of further postal worker walkouts and on Thursday, the matter was referred to industrial relations body Acas. A long battle appears likely and a sharp rise in staffing costs is the probable outcome.

2. Slumping parcel volumes

Trading at Royal Mail is highly sensitive to broader economic conditions. So the business is already toiling as the global economy veers towards recession. Revenues sunk 11.5% in the three months to June, on lower parcels and letters traffic. And rival FedEx’s decision to pull full-year guidance last week is a bad omen. It illustrates the rapid rate at which conditions are worsening in the courier industry.

Dividend questions

All this casts massive doubt on Royal Mail’s ability to meet City dividend forecasts. Indeed, it could be argued that current estimates are already looking highly optimistic.

The projected 17.4p per share payout predicted for this year is already higher than anticipated earnings of 15p. And dividends for financial 2024 are covered just 1.7 times by estimated earnings, well below the desired level of 2 times and above.

What’s more, the business could also decide to pay lower dividends than forecasters expect as it battles workers over pay demands.

CWU general secretary Dave Ward has directly criticised the £400m Royal Mail returned to shareholders through special dividends and share buybacks last year. He commented that, as a consequence, “our members won’t accept pleads of poverty from the company.”

The verdict

Sure, I like Royal Mail’s dividend yields. And I think profits may rise strongly over the long term as the e-commerce boom drives parcels traffic. But the firm is battling too many problems now that threaten shareholder returns.

And besides, I don’t think its high-risk profile is reflected in its price-to-earnings (P/E) ratio of 13.9 times. This is roughly in line with the FTSE 100 average.

The post 9.3% dividend yield! Should I buy Royal Mail shares for the BIG dividends? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.