In an apparent effort to benefit the everyday investor, anyone who applied for more than £10,000 worth of shares – close to the maximum ISA allocation for a single year – received nothing, while those who made an application of between £750 and £10,000 received 227 shares at a cost of £749.10. These are now worth more than £1,000 at the time of writing.
Investors with too much money lying around to invest have been left with a dilemma – what do they do with the excess cash? Royal Mail is now actively trading so they could buy up some stock now, but given that it has already risen by close to 40 per cent and there is likely to be a lot of profit-taking early on, only the most bullish investors would take the plunge now.
FE Alpha Manager James Henderson, who himself owns the stock, told FE Trustnet yesterday that he sees little upside potential for Royal Mail in the short-term, adding further weight to this argument.
With this in mind, FE Trustnet explores some of the alternatives on offer to the unlucky investors who missed out on the stock.
Stocks
Investors who want a like-for-like alternative to Royal Mail will be looking for an established, large cap, dividend-paying market leader with high barriers to entry. The business needs to be dependable and should remain buoyant even in times of stress.
A strong balance sheet, good cash-flow, low levels of debt and a high level of pricing power are also key attributes of Royal Mail, so investors will no doubt be looking out for these as well.
Helal Miah (pictured), investment research analyst at The Share Centre, highlights four companies that tick these boxes: National Grid, GlaxoSmithKline, Centrica and BP. All are FTSE 100 companies, with dividend yields exceeding 5 per cent.
"National Grid is a regulated business with a prospective yield of around 5.4 per cent – this combined with management’s focus on improving the return on its US operations should be attractive to income seekers," Miah said.
"We have long been fans of the group as an income stock and would not put such investors off drip-feeding into the shares at current levels."
Miah says a new dividend policy from 2014, which will ensure that National Grid’s yield will grow in line with inflation, makes it even more appealing.
The stock itself has had a bumpy ride of late and Miah says this could present investors with a buying opportunity; especially as he thinks this volatility is likely to subside before long.
Performance of stocks and index over 1yr
Source: FE Analytics
"The agreement earlier in the year with its regulators was seen as important and led to a period of share price outperformance," he said. "That initial euphoria has subsided and we would expect the share price to be less volatile going forward."
Miah also likes pharmaceutical giant GlaxoSmithKline, which is currently yielding 5.38 per cent. Like National Grid and Royal Mail, Glaxo operates in a traditionally defensive sector, though it is more internationally focused than the other two.
Like National Grid, GlaxoSmithKline has also experienced a hefty correction of late, after three years of very strong relative and absolute performance.
Henderson agrees that the company is a possible alternative to Royal Mail because it is one of the few FTSE 100 multinationals with such a high yield; however, he thinks the heathcare sector as a whole will come under pressure from pricing downgrades.
"For a long time, too much has been paid for drugs, and I think costs will have to come down," he said. "There will be a definite headwind from pricing for this reason."
While Centrica doesn’t always get the best press coverage and regularly comes under pressure from politicians, consumers and watchdogs as a result of price increases, Miah thinks it shares many characteristics with Royal Mail.
It is currently yielding 5.13 per cent, and has good pricing power and very high barriers to entry.
BP is Miah’s most adventurous choice. While it is yielding more than 5 per cent, it has typically been a more volatile stock than the others on the list, especially in the aftermath of the 2010 Gulf of Mexico oil spill, from which it has yet to fully recover.
Performance of stock and index over 5yrs
Source: FE Analytics
Many fund managers, including M&G’s Tom Dobell, believe that it is still in recovery mode, and so it could be a good option for investors looking for a blend of income and capital growth.
Miah commented: "BP is still in the realms of transforming itself – it is in the process of restructuring its portfolio, selling off low-returning assets and investing more in those which have higher growth opportunities."
"Initially this will result in a smaller and leaner operation, with production set to fall in the near-term; however, this is being sacrificed for the longer term prospects."
"The company is looking to improve operating cash-flows by 50 per cent before 2014, has reinstated dividends and is once again gaining investors' confidence."
"We recommend the stock as a 'buy' for investors willing to take on an intermediate level of risk while looking for capital growth and some income."
All four companies are popular with UK Equity Income managers, thanks to their healthy yield and large cap status.
GlaxoSmithKline is the most popular overall: it is a top-10 holding for 77 of the 99 funds in the sector. Among its biggest admirers are Neil Woodford’s Invesco Perpetual High Income fund, and Adrian Frost’s Artemis Income fund.
Funds
There was a mob mentality feel about the demand for Royal Mail shares – which were seven times oversubscribed – at the back end of last week. Even I, who has never invested directly in an equity, contemplated putting some money in.
The 38 per cent returns in a single day provide more than enough justification for buying the stock, but I can’t help but think that a lot of people who were buying, or attempting to buy, Royal Mail did so for one reason only: because everyone else was.
When I asked friends and family why they bought Royal Mail when I saw them this weekend, I was met with blank faces. There was the occasional "because the shares were undervalued", but when I pressed them on it, it was clear they weren’t entirely sure.
Investing in any company, no matter how defensive or big it is, is always a risk.
For that reason, anyone who missed out on Royal Mail may wish to consider a fund or an investment trust to park their cash in instead, and view Friday’s failure to attain shares as a "bullet dodged", not an opportunity missed.
Holding an investment portfolio of a number of stocks eradicates single-company risk. Better still, leaving it in the (hopefully) capable hands of a fund manager ensures that your cash is getting the attention it deserves.
A core UK Equity Income fund with a healthy yield and a defensive focus, holding the kind of companies Miah mentioned earlier, is the obvious alternative for those going down the collective route.
No funds hold all four of the companies Miah highlighted, although 22 hold all but National Grid. These include Artemis Income – one of the most popular UK Equity Income funds in the market, with £4.9bn in assets under management (AUM).
Adrian Frost’s fund has consistently beaten its sector and FTSE All Share benchmark, with less volatility. It invests almost entirely in large caps, and is currently yielding 3.9 per cent – significantly less than the Royal Mail, although it is above average for a UK Equity Income fund.
Performance of fund, sector and index over 10 yrs
Source: FE Analytics
The fund has been significantly less volatile than all of the single stocks mentioned earlier, as should be expected from a diversified portfolio.
Artemis Income has four FE Crowns, and Frost is an FE Alpha Manager. It is highly rated by Rob Gleeson and his FE Research team, and is included in the FE Select 100.
"The fund is ideally suited for investors who want to receive a predictable income steam through holding UK Equities," the team said.
"Frost and [co-manager Adrian] Gosden have a cautious approach and only invest in the largest companies in the FTSE that can provide an above-average level of income."
"The investment process has proved to be successful over the long-term and the team has excellent access to company management due to its extensive experience and good reputation."
Artemis Income requires a minimum investment of £1,000 and has ongoing charges of 1.54 per cent.
Other top-rated defensive UK Equity Income options include Invesco Perpetual High Income, Trojan Income and Threadneedle UK Equity Income, which all have five FE Crowns; however all are yielding less than Artemis Income.
If you are looking for a UK Equity Income fund with a yield similar to Royal Mail, the five crown-rated Fidelity Moneybuilder Dividend is a good option. It is currently yielding 4.22 per cent. JOHCM UK Equity Income is yielding even more, at 4.6 per cent, though manager Clive Beagles and James Lowen’s £2.1bn vehicle has a large weighting to mid caps, meaning that it tends to be more volatile than the others mentioned here.
