Royal Mail shares: should you go in for minimum £750?

Update, 11 Oct: Royal Mail shares - stick or twist? Should investors bank profits while they can, or hold their shares for the long term? Click here for Jane Lewis's latest Royal Mail advice

THERE are several ways to buy Royal Mail shares when the world's oldest postal service debuts on the stock market this autumn. One is to apply directly to the government by post. Spot the problem?

The largest privatisation for decades is being hailed as a ground-breaker – it really will be if Royal Mail becomes the first company in history to come to market while its service is blocked by a strike.

The British, as a US reviewer of the Peter Sellers classic, I'm Alright Jack, noted in 1960, have a talent for making great comedy from labour disputes. This one certainly promises a feast of farce. Man the barricades, posties! (And then nip home and take up your special share offer.)

Ministers may be donning tin hats and talking tough. But they seem pretty confident that investor appetite is strong enough to overcome union opposition Are they right?

Positive noises from fund managers certainly suggest that institutional demand from pension funds and the like will be strong. Royal Mail's modernising chief Moya Greene – a veteran of several privatisations in Canada – is held in high regard; and she's already proved her worth turning round an organisation which, until recently, was haemorrhaging cash. Profits rose 60 per cent to £324m last year.

And although Royal Mail isn't being marketed with the same vim as British Gas's lavish 1986 Tell Sid campaign, ordinary punters – who can apply for a minimum of £750 worth of shares – are already being targeted for the hard sell. The internet is awash with "special offers" from sharpster marketers, giving advice on how to "get ahead of the crowds" before the likely bonanza.

So, should you get stuck in?

Past privatisations have proved something of a mixed bag, but only a handful have gone seriously awry (notably Railtrack, which went into administration in 2001). Of the bumper Thatcher share issues, the best long-term performer is probably British Gas whose owners have enjoyed a twelve-fold increase in their investment. Granted, several high-profile 1980s sell-offs – including BT, BP and British Airways – have underperformed the FTSE-100 index over the long-term. But you'd still have made a killing if you'd got out in time. Shares in BT, which floated at 130p in 1984, rose to more than £10 during the dotcom boom of the late 1990s.

Still, Royal Mail faces more challenges than most. The government has helpfully removed the massive liability of its pension fund. But no-one needs reminding that its traditional business is in terminal decline: the number of letters delivered has slumped by 30 per cent since 2006. And, however crucial its statutory obligation to provide a six-day Universal Service is to the rest of us, it's a huge financial handicap on a fledgling private company.

Proponents argue there's great promise in Royal Mail's burgeoning parcel business which, thanks to an unexpected windfall from online shopping deliveries, now accounts for half of revenues. But there are plenty more agile competitors out there.

The example ministers love to cite, when talking up Royal Mail's glowing prospects in private hands, is Deutsche Post, which has expanded dramatically since its 2000 privatisation, thanks to access to private capital. Royal Mail will now be able to tap similar pools (at around half the interest rate that it currently pays the government). But the Germans have had a sizeable head-start.

On paper then, the Royal Mail doesn't look an enticing prospect. But in the end, it all boils down to price. We won't know the full details until the prospectus is published, but shares will certainly be priced to seduce – the last thing the government wants is a flop. City analysts reckon on an initial valuation of somewhere between £2.5bn and £3bn which, given profit projections, looks cheap enough. And the dividend – promising a yield approaching seven per cent - is a real attraction for income-starved investors.

The danger is that punters, looking for a swift return, will pile in and then flip the stock causing it to slump. But the mood in the wider market look promising. Big US investors, leery of Asia, have been pumping record sums into European stocks. They may well view Royal Mail as a play on Britain's recovery story, and a nice little earner to boot.

As for strikes, bring them on, is the view across much of the City. There'll be brinkmanship, but the dispute will eventually be settled – and, anyway, there's a long tradition of buying "when there's blood on the streets". One word of advice, though, if you are sold on buying in. Do play safe and apply online. · 

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