Royal Mail is handing £400m to shareholders after its parcel delivery business benefited from the greater shift to online spending during the Covid pandemic.
It achieved a £311m pre-tax profit in the six months to 26 September, after barely scraping a profit last year, thanks to an accelerated trend to more parcels, which it described as a permanent shift. Revenues rose by 7% year-on-year to £6.1bn.
The news sent shares up 7% on Thursday, making the postal services firm the top riser on the FTSE 100 and pushing its market value up by £300m to £4.7bn.
The strong financial recovery plus cash buffers built up during the pandemic have allowed Royal Mail to give shareholders money, despite its ongoing investments in automation to make it more efficient and efforts to make £110m in costs savings.
It said on Thursday it would return £400m via a £200m share buyback that will start immediately and a £200m special dividend. It will also pay a £67m interim dividend.
Keith Williams, Royal Mail’s non-executive chair, insisted the company would be able to fund investment in new technology and growth from future cash flows, justifying the shareholder returns, even as it prepares for the crucial Christmas period.
The company failed to cope with parcel volumes at Christmas last year, but Simon Thompson, who was installed as chief executive in January this year, said it had improved its efficiency and invested in more double-decker lorries as well as driver training since then. The date of the last post for Christmas day has not been changed.
“The things we learned we now have in place for this year,” Thompson said.
The results mark a turnaround in fortunes for the delivery company, after the early pandemic lockdowns depressed Royal Mail’s profits, adding new costs and hitting the volumes of letters sent.
Nevertheless, Royal Mail said it has experienced a “structural shift” in parcels, with volumes up by a third during the financial half year compared with before the pandemic – although they were down by 4% compared with 2020, when customers were locked down at home and non-essential shops were closed.
The company, which was controversially privatised in 2013, has struggled with what it described as the “structural decline” of letters as more people use email for official purposes, with revenues from parcels overtaking that from letters for the first time a year ago. It delivered more letters between April and September than the equivalent last year, but still a fifth less than in 2019.
At the same time Royal Mail has been restructuring. A new management team has brought in an agreement with the Communication Workers Union after a breakdown in the relationship under former chief executive Rico Back and cuts to 2,000 management jobs in June 2020.
Royal Mail has also been pushing to weaken some of the “universal service” requirements imposed on it as a former state-run operation, including removing the obligation to deliver post on Saturdays. Thompson hinted that it would push this agenda further, saying the company needs to “start defining what a sustainable universal service is for the future”.
“We have to acknowledge the world has changed,” Thompson said. The company did not want to “invest in services that perhaps customers no longer need,” he said.