PSTNY - PostNL Stock Tumbles Dividend Crashes

2023-03-10 13:14:05 ET

Summary

• PostNL's business is facing significant macroeconomic pressure.
• Stock prices recovered somewhat, but I feel to see a proper reason for shares to trade higher.
• The dividend has been cut, and further cuts in 2023 are expected.

In late 2022, PostNL ( PSTNY ) issued a profit warning due to macroeconomic pressures that increased costs without returning value on investments to support e-commerce growth. At the time, I put a sell rating on PostNL stock. In this report, I will look at the stock performance, the dividend, the financial results over 2022, and the outlook for 2023.

PostNL Stock: Was I Wrong?

Since I wrote the report in 2022, PostNL stock actually gained 13.6%. You could say that my sell rating was not justified, as not only did PostNL stock gain but it also outperformed the stock markets. However, the framework for the piece was written a day prior to the profit warning, outlining the pressure on the stock as well as the dividend. Since then, the stock lost roughly 2%.

PostNL Loaded Costs Into The Business Without Growth

I won't discuss the results in detail, because what happened at PostNL is quite simple. The company invested to handle higher capacities more efficiently, and that capacity did not materialize. Three to five percent in parcel decline was expected, but due to inflation, the actual decline in parcel volumes was 10.2% and 8% in mail volumes in the Netherlands. So investments were made and PostNL turned itself into CostNL as it could not take out the costs anymore, and on top of that, they had the inflationary pressures on labor and transport. PostNL does not have levers to take out costs fast, they did have some flexibility on not renewing externally contracted work, but that is pretty much about it next to optimizing routes.

For 2023, things are not looking much better. Normalized EBIT at the midpoint replicates the 2022 performance, while income and free cash flow are expected to be lower than last year. The recovery is expected to materialize in 2024 and beyond, which I believe doesn't make PostNL a very compelling investment, even more so if you consider their dividend policy.

PostNL Dividend Cut

One main reason why I marked the stock a sell last year is because due to the disappointing 2022 outlook and performance, I deemed it unlikely that the dividend would be sustainable. PostNL targets an adjusted net debt to EBITDA of 2, and I had significant doubts whether the company would be able to achieve that for 2022. If they wouldn't, it could mean that the dividend would be cut altogether. While it is not quite clear, it is important to realize that when calculating the leverage, the adjusted net debt as well as the adjusted EBITDA are used for calculation. When doing so, the leverage for 2022 was 1.9. If the EBITDA would be used, it would be above 2.0.

So, the question really was whether PostNL would pay a dividend, and they will, but that dividend is going to be small as the company usually pays out 70% to 90% of the normalized comprehensive income. For 2022, a dividend of €0.16 has been proposed, meaning that the dividend is to be slashed from €0.42 in 2021. Over the first half of the year, €0.14 had already been paid out, and over the second half pending shareholder approval €0.02 will be paid, marking an 85% sequential decline and a >60% decline compared to last year.

Currently, on paper, PostNL has a forward yield of 9.5%. However, if you look at the latest dividend proposed and project that forward, then the dividend yield is only around 2%, and you could really wonder what the 2023 dividend will look like. Even if we ignore the fact that the leverage might make PostNL decide not to pay a dividend at all, the dividend will fall to €0.07 from €0.125 for 2023. That still provides a 4% to 8% yield, but this high yield also reflects the risk, and the reality is that it is highly likely that the dividend will decrease for the second year in a row with no shareholder return in the form of stock repurchases as that would very likely render the company unable to meet its framework multiple of 2.0.

Conclusion: PostNL Stock Remains A Sell

I believe that PostNL stock remains a sell, I don't believe that it is the best capital allocation to remain invested in PostNL with the current uncertain environment for the company and the continued downward pressure on the dividend. Chasing high yield can be risky, and I believe that PostNL is the perfect example of that.

For further details see: