Royal Mail puts parcels at heart of growth plan

By Shashwat Awasthi and Noor Zainab Hussain

(Reuters) - Royal Mail Plc slashed its dividend by 40% on Wednesday to fund a new five-year turnaround drive focused on expanding its parcels business internationally to better position the group for a future dominated by online deliveries.

Facing the threat of renationalisation from the opposition Labour Party, the former British monopoly promised to invest a further 1.8 billion pounds in its UK postal service in the hope of turning it around.

Royal Mail's shares rose as much as 9 percent to 231 pence but that is still well below their flotation price of 330 pence in 2013.

In a sign of changing priorities, the company will introduce about 1,400 parcel postboxes across the UK, in what it said was the single biggest change to the traditional red postbox network for over 160 years. The new boxes will have wider openings to accommodate packages.

Chief Executive Rico Back told Reuters it would seek to earn 40% of revenue from its operations outside Britain and 70% from parcel deliveries by the end of the five-year period. The comparable figures are 25% for each measure.

To fund that drive, the company said it would cut its dividend for 2019-20 to 15 pence per share from 25 pence in 2018-19.

"That decision was not an easy one and not really taken lightly ... We have a lot of postmen and postwomen as shareholders ... we understand the importance of the dividend to them," said Back, who has been in the top job for a year.

Struggling with a market changed by Amazon and online shopping as well as the move away from sending letters, Royal Mail has been reviewing operations and testing new delivery methods.

"Investors hungry for yield may be disappointed, but strategically it is absolutely the right move ... today's strategy update means going all in on parcels – it's about time," Markets.com analyst Neil Wilson said.

PARCELS PUSH

Royal Mail appointed its third chairman in a year in March and has been facing a shareholder revolt over management pay packages, while its shares, down two thirds in the past 12 months, dropped out of London's blue-chip index at the end of last year.

The company forecast adjusted operating profit after certain costs of 300 million pounds to 340 million pounds for 2019-20, down from the 411 million pounds it reported for the year to March 31.

"Royal Mail is focusing on making this ambitious plan work. That is our key target. Whoever owns us, doesn't change the imperative for the necessity to change our business," Back said on Labour's plan for renationalisation.

He said the company's priorities over the next five years include growing in the UK and expanding its General Logistics Systems (GLS) unit into parcels from one country to another.

Royal Mail has a target to earn about 4.5 billion euros in revenue from GLS - its ground-based parcel network - in 2023-24, compared with 3.3 billion euros in 2018-19.

Cross-border parcels currently account for around 20% of GLS' revenue and the unit will enter the small parcel market, working with Royal Mail International to improve its export offering to Europe and North America, the company said.

GLS, formerly run by CEO Back, operates in 41 countries and nation-states in Europe as well as eight states in the U.S. and also entered Canada last year as part of its expansion drive.

"In a nutshell, we'll be growing, we will be more efficient, and we will be a more diversified business," Back said.

(Reporting by Shashwat Awasthi, Noor Zainab Hussain and Pushkala Aripaka in Bengaluru and Kate Holton in London; editing by Gopakumar Warrier/Keith Weir)