Summary

• 159 years old Poste Italiane is a post service provider with 12.7K offices in Italy and 35M customers.
• Dividend growth has been high in the past. Dividend yield of 4% is one of the highest in the industry.
• Revenue has been resilient to the pandemic. Profits more than doubled in the past 5 years and resumed growth after disruptive 2020.
• The expected future annual returns are single-digit after 52% run in stock price in the last 12 months.

Dividend    Revenue    Profitability    Financial Strength    Investment Case

According to the company website, Poste Italiane (PST) is the largest logistic operator in Italy and a leading player in the financial, insurance & payment services. The postal logistics network consists of Collection, Sorting, Transportation and Delivery.

The company has the following 4 Strategic Business Units (SBUs):

• Mail, Parcels and Distribution – 48% of total revenue in 2020. Main activities are mail and parcel handling.
• Payments and Mobile – 6.6% of revenue. Payment management, electronic money services and mobile & fixed-line phone services by PostePay.
• Financial Services – 34.7% of revenue. Placement and distribution of financial and insurance services.
• Insurance Services – 10% of revenue. Issuance of Life and Non-life insurance products.

The Group provides services through the following 3 channels:

• The physical network of Post Offices. There are two units within this channel – Post Office Network and Business & Public Administration.
• A digital web channel and apps consisting of poste.it website and APPs.
• Third-party networks of 37K retail outlets.

Poste Italiane has developed strategic plan “2024 Sustain & Innovate”. It innovates by reorganizing processes and operating structures and introducing new products and services.

Italy’s Ministry of Economy and Finance owns 29% of the company shares.

Poste Italiane acquired 70% of MLK Deliveries (same day and scheduled delivery services), 100% of Nexive (Italian postal operator) and Sengi Express (provider of cross-border logistics solutions for Chinese e-commerce merchants active in the Italian market) and made other acquisitions.

   Dividend

Dividend	Dividend Yield	5Y Growth	PayOut Ratio
EUR 0.486 per share	4%	7.4% per year	51%

Dividend growth has been smooth and consistent over the last 5 years. Dividend has been growing at 7.4% per year on average. In 2020 it is 5.65% higher over year.

Payout ratio of 51% shows that the company pays out about half of its earnings. Free cash flow, calculated as operating cash flow plus interest expenses and less cash flow from investing activities, is EUR 2.6B. Dividends paid in respect of 2020 amounted to EUR 0.63B. So dividend is well covered by the company’s free cash flow.

In the future a dividend could grow at a similar rate as in the past, if supported by EPS growth.

  Revenue

Revenue	5Y Growth	Revenue growth over 2020	Company Outlook 2021
EUR 10.53B	-19%	Total sales                           -4% By divisions: Mail, Parcels & Distr.      -8.3% Payments and Mobile    +11% Financial Services            -3.7% Insurance Services          -1.6%	There is no revenue outlook for 2021 and beyond provided by the company.

Since 2016 revenue has been increasing up until 2020. In 2020 revenue is down 4% only despite Covid-19 related disruptions. The performance of business units in 2020 has been as follows:

• Mail, Parcels and Distribution – Traditional mail is in decline as it is replaced by digital forms of communication – e-mails and messaging. At the same time there is a significant increase in the volumes of parcels delivered. The pandemic has accelerated those trends. The key driver of growth in parcels segment has been e-commerce in light and low-value items. 9% of all purchases were made online. Overall the business unit reported more than 8% decline in revenue as lower revenue from traditional mail was only partly mitigated by the growth in parcels. In the future parcels are expected to generate about 50% of the unit’s revenue.
• Payments and Mobile – This business unit has been the only one with positive growth over year (+11%) due to a growth in telecoms segment and a good performance in Electronic Money segment.
• Financial Services – Revenue is down 3.7% due to the decrease in revenue in the distribution of financing products and collection & payment services.
• Insurance Services – The main contributor to revenue decline was the Life business.

Total financial assets (postal savings, current accounts, investments funds and other) increased by 6% to EUR 569B.

In the three pre-pandemic years the company experienced a steady growth in revenue of about 1.2%. Unfortunately the company does not give any quantitative guidance for the coming years. Poste Italiane struggles with declining traditional mail but it plans to benefit from the growth of e-commerce. Significant investments in logistics and technology are planned to innovate and expand businesses. In the first half of 2021 the revenue is 14% higher than in the first half of 2020 due to significant growth in parcels business and insurance services. It could be expected that moderate growth in revenue of this diversified portfolio of businesses will continue in the coming years.

  Profitability

Profit	5Y Growth	Net Profit Margin	ROE	Company Outlook 2021
EPS EUR 0.93 Net Profit EUR 1.21 B	17% p. a.	11.5%	10.5%	No quantitative profitability outlook provided by the company.

EPS has been in sound uptrend in the past: it more than doubled in the past 5 years. In the pandemic-troubled 2020 it is down 10%. The net profit is also down 10% to EUR 1.206B and the operating profit is 14% lower. The net profit was negative in Mail, Parcels and Distribution unit and the highest in Insurance Services. Total costs decreased by 2% mainly due to lower personnel expenses.

Average annual EPS growth has been impressive in the last 5 years. In the first half of 2021 it is even better as the profit is 42% higher year-on-year. Historical performance shows the management’s ability to adapt to changing market trends and consistently grow profits. Considering a moderate revenue growth, we could expect average annual EPS growth to be in high single-digit percentage in the coming years.

  Financial Strength

Company Capital Structure

In EUR B

Year	2019	2020
Equity	9.7	11.51
Debt	78.36	98.23
Debt/Equity	808%	853%

The debt has increased over year from EUR 78.4B to EUR 98.2B leading to very high Debt -to- Equity ratio of 853%. Also it is not well covered by operating cash flow as the coverage ratio is only about 2%. On the other hand interest payments are easily covered by operating profit with coverage ratio of 20x.

  Investment Case

The estimate of future stock price and investment returns based on P/E ratio

Assumptions of dividend and EPS growth over the next 5 years
The dividend could grow at 7% per year. So the total dividend income over the next 5 years would amount to almost EUR 3 per share. We assume EPS growth of 8% p.a. in the coming years. Then EPS in 5 years would be EUR 1.37 per share.
Projected stock price
Average P/E over the last 5 years (10) multiplied by EPS in 5 years = 10 x EUR 1.37= EUR 13.7
Future Returns Based on the Assumptions
Stock price upside potential                                       12%    from the current price EUR 12.18 Overall return on investment*                                     36.7% Compound Annual Return on Investment                 6%

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

Poste Italiane has diversified portfolio of products and services. It intends to expand it by entering new markets segments (pharma and food) and new geographies (expansion in China through acquired Chinese operator Sengi Express). Revenue has been resilient in the pandemic hit year. The company even increased a dividend and it still amounts to only half of earnings.

Over the last 12 months the company generously rewarded shareholders through dividends and a stock price appreciation by 52%. From now on a more moderate pace of growth in a stock price should probably be expected. The company belongs to defensive industry and has solid and consistently growing dividend. These make it good choice for balanced dividend growth portfolio even though the expected future investment returns are only single-digit.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any position within the next 72 hours.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.