The postal organisation was floated by the government on the stockmarket in a frenzied initial public offering (IPO) that represented the biggest privatisation in the UK since the railways were sold off in the ‘90s.
The Royal Mail shares offer was seven times oversubscribed and thousands of direct retail investors who had requested between £750 and £10,000 of equity received shares priced at 330p.
As the shares were then floated on the market their value rocketed to more than 450p, providing investors with an instant profit.
But in spite of the clamour of big institutions to get hold of more shares, advisers were bearish on the group’s prospects, both as an investment and due to the lack of government incentives to sell the shares.
Brian Dennehy, managing director at Dennehy Weller & Co, said Royal Mail shares were “not an investment but a distraction”.
“Nobody woke up yesterday and said: ‘I have a hole in my portfolio for a postal delivery service’,” he said.
“These new launches are really a fairground attraction. For a short while it is the noisiest ride attracting the punters with some loose change. It is just punting by retail investors and shouldn’t be taken too seriously.
“This is all about politics and greed.”
Mr Dennehy added that investors considering purchasing Royal Mail stock should treat it as if they were buying a fund.
“As with any new fund launch, you have to ask yourself whether there were any existing shares out there with greater long-term growth potential and with clear track records already established.”
Jason Butler, partner at Bloomsbury Financial Planning, said he would not get clients involved in an IPO.
“All the evidence is that you should not buy shares in an IPO because it is not the true price – it is a price someone has made up,” he said.
“You need the price to settle to its true value.”
The demand saw broker Hargreaves Lansdown unable to process every request last Friday, with the company apologising on its Twitter feed to those unable to trade the shares.
Tom McPhail, head of pensions research, said: “I know that we and other brokers have struggled to deal with the demand.
“Demand has been off the scale.”
Mr McPhail added that Hargreaves Lansdown had six times as many staff on its broking desk as normal to deal with the demand.
But Devon-based Philip J Milton & Co chose not to be an agent for the IPO. Philip Milton, managing director at the firm, said during previous government privatisations there had been a financial incentive to help companies cover the cost of promoting the shares to clients.
He said he had considered being an agent, but was “very much dissuaded as there was no capacity to get payment for dealing with the process of the share applications”.
Mr Milton said he would have potentially organised a mailshot to clients, but there was no way of recouping costs for this from the government.
“If you act as an agent you are usually paid as a reward, as you are helping them sell their shares,” he said.
“They did help last time as there was a selling cost and that was factored in.”
But the adviser said this was not his only objection to handling the stock.
“If it was something I thought was so attractive that I had to buy it, I would not have put the financial reason in the way but I didn’t believe it was.”
...but some fund managers are giving Royal Mail a stamp of approval
Even though advisers have appeared bearish on buying Royal Mail stock, fund managers have been much more optimistic about bagging the shares and adding the business to their portfolios.
Simon Callow, co-manager of the £160.2m CF Miton Diversified Growth fund, said he had put a bid in for the shares because he saw the company as robust and liked the fact it operated essentially in a duopoly with few comparable competitors.
“It has got such a fantastic infrastructure across the country and the pension liability was handed to the government about 18 months ago,” he said.
“Also, online e-commerce is expanding and Royal Mail is one of the major players in the growth of that industry. You are looking at a pretty high yield on the stock of roughly 5 per cent or so; the dividend is twice covered and the growth of the business is supportive of that.
“It is not often an asset like that comes to the market.”
Tom Stevenson, investment director at Fidelity, said the hype surrounding Royal Mail was akin to that seen in 2000 when lastminute.com was set to join the stockmarket, but he added that was where “the similarities end”.
“Lastminute.com was emblematic of its time,” he said.
“Investors were buying into a blue-sky vision of future growth. Royal Mail is, by contrast, a pick-and-shovel investment, a beneficiary [once removed from] the internet revolution that has seen us buying more and more online. One broker’s note described it as a ‘cash-generative group, with reduced regulatory constraints and a much-improved balance sheet’”.
