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Royal Mail Cuts Dividend, M&S Launches Rights Issue

M&S's shares are off after details of the rights issue emerged, while Royal Mail, one of the FTSE 350's highest yielding shares, is to cut its dividend

James Gard 22 May, 2019 | 11:09AM

Royal Mail Group

Marks & Spencer (MKS) and Royal Mail (RMG), two of the top dividend payers in the FTSE, have surprised investors with their annual results today. M&S has revealed plans for a discounted rights issue while the postal giant is the latest in a line of high-yielding stocks to slash its dividend. 

Investors Wrong-Footed by Rights Issue

Marks & Spencer shares fell sharply on Wednesday morning as it revealed the details of its rights issue to fund its joint venture with Ocado (OCDO). A rights issue is when shareholders are given the opportunity to buy more shares at a discounted price. Companies do this to raise money for investments and acquisitions. The downside for investors is that a rights issue dilutes the value of existing shares, simply because there are more shares in existence but the business is still worth the same amount. 

The rights issue will offer existing shareholders one share for every five they hold, at a price of 185p per share - a significant discount to the current market price of 259p. A rights issue had been expected by the market to fund the Ocado deal but the extent of the discount has caught investors unawares.

The share price fall came despite a rise in full-year pre-tax profits to £84.6 million and signs of progress in Marks & Spencer’s turnaround plan under chief executive Steve Rowe. In 2018 the company planned £350 million of cost cuts by the end of the 2021 financial year. In the 2018/2019 financial year, Marks had cut £100 million of costs from the business.

When the deal with Ocado was announced in February, shares dropped 10% on fears of the cost of integrating 50% of the online food retailer’s UK business. The weakness in the share price has pushed up the yield on M&S’s shares to more than 7% in recent months. Over a four-year period, the share price have more than halved.

The full-year dividend of 13.9p is 25% lower than the total payout for the previous year. The company said on Wednesday: “Having considered carefully other options, we believe it is appropriate to finance the joint venture by means of a Rights Issue and to reduce the Group’s annual dividend payment to a sustainable level, which we aim to grow in line with earnings over time.”

The agreement with Ocado will make both M&S food and general merchandise available on Ocado.com from September 2020, replacing Ocado’s long-standing deal with Waitrose. Ocado will continue to supply its own-label products and big-name branded goods on the platform, too. M&S will pay an initial £562.5 million and deferred payment of up to GBP187.5 million, plus interest.

Royal Mail Latest to Cut Payout

Royal Mail also joined the dividend cutters today by “rebasing” its payout for the next financial year.

In Morningstar’s recent update to its list of FTSE 350 dividend payers, Royal Mail is number 11 on the list of the highest yielding companies. Recent share price falls which have driven the company’s value to a record low, have pushed the yield above 10%.

Royal Mail is to pay 25p per share this year, with the share price around 220p, but from next year will pay 15p and boost this in subsequent years whenever there is “substantial excess cashflow”, the company said.

“Given the importance of the dividend to many of Royal Mail’s shareholders, the decision to cut can be taken as an indicator of the severity and long term nature of the challenges the UK’s postman faces,” Hargreaves Landsdown’s equity analyst Nicholas Hyett says.

Revenue and pre-tax profits were higher for the full year, but adjusted operating costs were down 34% to £376 million. The cost of transforming the business, which has proved an uphill struggle since the high-profile IPO in 2013, were £133 million last year.

According to Morningstar data, Standard Life Aberdeen and BlackRock hold over 5% of Royal Mail's shares each, while Mark & Spencer's shares are held by BlackRock (5.58%) and Schroders (5.55%).

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Marks & Spencer Group PLC177.55 GBX2.36
Ocado Group PLC1,152.00 GBX-0.43
Royal Mail PLC232.10 GBX2.70

About Author

James Gard  is content editor for Morningstar.co.uk

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