Royal Mail gets £106m profit boost from the taxman from decision to close its pension scheme

Oliver Gill
Follow Oliver
Royal Mail reported its half-year results this morning (Source: Royal Mail)

Royal Mail profits today received a £106m boost from the taxman as a result of the postal giant's controversial decision to close its mammoth pension scheme.

Revenue for the first half of the year rose two per cent, with profit after tax almost doubling to £168m.

Chief executive Moya Greene said the results capped "a good start to the year", adding that "our investment in our business is paying off".

Shares in the firm rose over four per cent in early trading.

The larger of Royal Mail's two divisions, its UK parcels and letters business, posted flat revenues of £3.6bn, with operating profits falling by £12m to £247m. International arm GLS continued its "strong" growth, with revenue swelling by nine per cent to £1.2bn and operating profit jumping by 23 per cent to £90m.

Opinion: Royal Mail is held back by out-of-date red tape

Royal Mail is locked in talks with unions over a raft of proposed changes to working practices, which also include the closure of the firm's "gold-plated" final salary pension scheme.

A 48-hour strike, the first since the Royal Mail was privatised, was averted last month after the High Court ruled further arbitrated negotiations must take place.

Today, the 501-year-old firm warned:

Industrial relations environment could impact our performance in the second half

Meanwhile, Royal Mail said the one-off £106m tax credit "related to the decision to close the [Royal Mail Pension Plan] RMPP to future accrual after 31 March 2018".

The adjustments are a result of changing a previous assumption that the firm's pension scheme, while currently in surplus, is expected to slump into deficit and cost the firm more than £1bn annually to keep open.

The FTSE 250 firm today revealed net debt has fallen from £452m to £382m. With earnings doubling from 8.6p to 17.1p per share, Royal Mail hiked its dividend by four per cent to 7.7p per share.

What the analysts said

ETX Capital senior market analyst Neil Wilson said:

"More of the same from Royal Mail with good growth in parcels and GLS while letters are in freefall decline: yet more evidence of the structural problems it faces as it heads into the key Christmas trading period. Whilst letters weigh, parcels look solid, GLS is strong and the dividend yield certainly looks attractive.

"As ever, it all hinges on Christmas but with like the rest of the letters market, Christmas cards are ex-growth. The rapid decline may have slowed as consumers realise Christmas emails are not all they’re cracked up to be and increasingly go upmarket, but broadly speaking this is about managing the decline in volumes.

GLS remains the star performer as Royal Mail continues to lean heavily on its overseas operations for revenues.

Meanwhile, labour negotiations hang over the stock. The update notes dryly that ‘the industrial relations environment could impact our performance in the second half. It’s so far avoided a Christmas strike (which would be disastrous) but concessions mean higher labour costs eating into profits.

Reported after tax profits of £168m – double the £87m last year - mean it’s still highly cash generative and can afford a progressive dividend.

Read more: Royal Mail boss swoops in and will lead strike talks

Related articles