- PostNL had a fabulous year and is reinstating the dividend sooner than expected.
- It will pay out 0.28 EUR per share for FY2020 and is guiding for a dividend of 0.29 EUR per share for FY2021 and 2022.
- PostNL will allow its shareholders to elect to get the dividend in new shares. No Dutch withholding tax is due on a stock dividend.
- This idea was discussed in more depth with members of my private investing community, European Small-Cap Ideas. Learn More »
PostNL (OTCPK:TNTFF) has been a generous dividend payer in the years its financial position and performance allowed it to pay a dividend. This changed in 2019 when the Dutch postal services company was allowed to purchase a private competitor Sandd to strengthen its market share in the Dutch market. However, PostNL said it would suspend the dividend as it works on integrating Sandd in the system and is absorbing the 130M EUR acquisition. PostNL expected the suspension would last 12-24 months before gradually restoring the dividend. But then COVID-19 happened, and PostNL’s 2020 was an exceptionally good year allowing it to quickly reduce its net debt and reinstating the dividend at a rate higher than before the Sandd acquisition.
Source: Yahoo finance
PostNL has a primary listing on Euronext Amsterdam where it’s trading with PNL as its ticker symbol. The average daily volume is about 5.8 million shares for a monetary value of in excess of 20M EUR per day. The current market capitalization is approximately 1.78B EUR.
The company website only contains "download-only" links, but you can find all relevant information here.
Thanks to the COVID-tailwinds, 2020 was a fabulous year
It’s tough to imagine PostNL was a penny stock just about a year ago as the stock was sold down during the initial weeks of the COVID pandemic. As the market started to realize PostNL was actually slated to benefit from the lockdowns as it was massively benefiting from the boom in parcel deliveries, the share price started to gain momentum again.
This culminated in a very impressive fourth quarter as the parcel volume increased by about 30%, pushing the Q4 revenue to in excess of 1B EUR, which is about 50% of the first three quarters combined. This pushed the full-year revenue to 3.24B EUR, an increase of almost 15% compared to FY 2019. The operating expenses obviously increased as well, but the operating income increased by around 150% to 293M EUR.
Source: financial results
As PostNL is running a balance sheet with hardly any net debt, the interest expenses are relatively low at approximately 16M EUR for the entire year. Given the low net debt of just around 60M EUR the interest expenses appear to be rather high, but PostNL likes to have a substantial cash balance on its bank account and the balance sheet contains about 710M EUR in debt but also 650M EUR in cash. Considering the gross debt position exceeds 700M EUR (excluding lease liabilities), the 16M EUR in net interest expenses is actually pretty reasonable.
The bottom line shows a net income of 213M EUR, which is more than 50 times higher than the net income of 4M EUR in 2019. The EPS in FY 2020 came in at 0.43 EUR per share, which means PostNL is currently trading at just over 8 times its 2020 earnings.
The outlook for 2021 is very strong as well, and the high dividend likely won’t be a one-off
Investors need to realize 2020 was an exceptional year due to the COVID-19 restrictions in place. I expect the tailwinds to continue in the first half of this year but as the Dutch economy gradually reopens, we can likely expect the parcel volume to decrease again as more consumers will actually prefer to go to brick-and-mortar stores. That being said, 2021 will still be a good year, and PostNL issued an upbeat outlook:
Source: press release
The free cash flow of 200-230M EUR represents a FCF per share of approximately 0.40-0.46 EUR despite the lower EBIT result. The explanation is quite straightforward. Thanks to the very profitable year 2020, PostNL decided to accelerate its pension payments and made a 200M EUR lump sum payment in Q4 2020 and will cover the remaining pension deficit of less than 90M EUR in five annual installments. This will reduce the pension liabilities by almost 20M EUR per year and the higher interest rate on the markets may actually accelerate closing the pension deficit gap.
Source: company presentation
As the company rapidly improved its balance sheet, it now is in a position again to start paying dividends as the acquisition of Sandd has been absorbed and the pension deficit has been reduced by approximately 70%. I was expecting PostNL to be in a position to start paying an interim dividend in the summer of 2022 but the e-commerce boom caused by the COVID pandemic accelerated things and PostNL has announced it will pay a dividend of 28 cents per share attributable to the FY 2020 net profit. At the current share price, this represents a dividend yield of almost 8%, while the payout ratio is just around 65%.
The dividend will be payable at the end of May, and despite printing cash, PostNL will allow shareholders to elect a stock dividend option (the ratio will be determined closer to the actual dividend date). This could be an interesting option for certain shareholders as stock dividend usually don’t incur the traditional 15% dividend withholding tax in The Netherlands.
And not only does PostNL surprise with the generous dividend for FY 2020, the company also seems to be confident in its longer-term outlook, as it's already guiding for a dividend of 29 cents for both 2021 and 2022 which would push the dividend yield to in excess of 8% based on the current share price.
The exceptionally strong cash flow in 2020 allowed PostNL to do two things: Sharply reducing the pension deficit while reinstating the dividend right away. Despite this, I will be looking to monetize my position in PostNL over the next 12-24 months. I have started to write call options with strike prices ranging from 3.6-4 EUR but with expiry dates after the FY2020 dividend payment on my existing position. I’d be happy if the position gets called away at those levels as that will allow me to recycle my cash and look for new opportunities.
PostNL has been very lucky in 2020, and the tailwinds will continue in 2021 before fading out into 2022. However, PostNL has a few irons in the fire to try to soften the impact of the post-COVID blues as it continues to invest in digitalization while the free cash flow which isn’t being distributed as a dividend will further strengthen the balance sheet and allow PostNL to reduce its gross debt, especially as PostNL seems to be taking the expected strong cash flow in 2021 as an opportunity to accelerate capex spending before the capex starts to trend down again from 2022 on.
Source: company presentation
I currently have a long position in PostNL but I'm not adding at the current levels. I will be looking to unwind my position before the end of 2022 but I’m in no rush to do so as I will be enjoying the dividends flowing into my portfolio.
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Analyst’s Disclosure: I am/we are long TNTFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I have a long position in PostNL but will be looking to monetize this position in the next 12-24 months.
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