Morgan Stanley cuts payout assumption for Royal Mail, but upgrades
By Iain Gilbert
Date: Thursday 14 Feb 2019
(Sharecast News) - Analysts at Morgan Stanley upgraded Royal Mail to 'equal-weight' on Thursday but lowered their target price on the postal service firm as it adjusted for medium-term pressures on letter volumes and lowered its dividend payout assumptions.
Morgan Stanley further noted that while dividend growth remained unclear, the investment bank felt Royal Mail's shares now reflected the risks to EBIT growth, resulting in its recommendation upgrade from 'underweight'.
"We think the shares already reflect a reasonable amount of risk related to the dividend cut as well," said MS, as it lowered its payout ratio assumption from 100% to 80%.
However, Morgan Stanley pointed out that bigger dividend cuts versus its estimates would imply a further downside risk.
In parallel, the broker reduced its estimates for Royal Mail's earnings before interest and taxes by 1% for fiscal year 2019, from £519m to £511m, and for fiscal year 2020 by 6% from £543m to £499m.
As a result of Royal Mail's declining mid-term earnings trajectory and changes to their dividend model - which was now in line with the average historical payout ratio - the analysts cut their target price on Royal Mail's shares from 370p to 270p.
"Considering the uncertainty around the dividend Royal Mail remains our least favourite stock among the postal players and our least preferred equal-weight."
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