The modern postal system emerged half a millennium ago, when Habsburg royalty commissioned a courier network to learn swiftly of trouble brewing across the empire. Today, Germany's dominant mail operator Deutsche Post AG has an equally impatient customer base, but now it's Amazon-addicted millennials rather than rattled royals.
E-commerce deliveries have saved the postal companies, just as email threatened to send the humble letter the same way as the pigeon post. Last year Deutsche Post handled 1.2 billion parcels in Germany, about 15 parcels for every citizen. That's 9 percent more than in 2015. Parcels are starting to displace letters as a revenue source:
This should bode well for mail operators. The German parcel market's expected to expand about 6 percent a year until 2020. But it's not an easy business to get right. Competition is fierce, as are customer demands. Unless they promise a parcel will arrive tomorrow (preferably today), mail companies might as well not bother.
Yet building "must have now" networks is expensive. United Parcel Service Inc. is struggling with parcel delivery costs, as Gadfly's Brooke Sutherland explains here. For its European rivals, success increasingly hinges on being able to handle cross-border traffic too. Deutsche Post's capex has climbed more than 60 percent in six years and will probably rise again in 2017. It's also buying companies to expand internationally, including the $316 million purchase of UK Mail Group Plc.
Naturally, investors fret that there will be no end to mail companies' high spending as they confront the digital age. Today, it's same-day delivery, tomorrow drones and driverless trucks. Then there's the perennial fear that Amazon.com Inc. will become a fully-fledged delivery company.
Plus being a legacy mail provider carries a cost, in particular pensions (something Amazon doesn't contend with). Low interest rates prompted Deutsche Post to top up its pension pot by one billion euros in 2016, which weighed heavily on free cash flow. Net debt more than doubled year-on-year.
Still, Deutsche Post appears to be meeting the challenges relatively well. As Germany's postal service it has a big head-start in last-mile delivery and its investments in automated sorting centers create barriers to entry. Annual profit at its post, e-commerce and parcel division jumped almost a third percent compared to 2015, and overall net profit rose more than 70 percent.
While the German state still owns 20 percent of Deutsche Post shares, this hasn't held back shareholder returns. It promises 1.3 billion euros of dividends this year (a 3.3 percent yield), on top of the 1 billion euro share buyback launched last year. Yet the shares trade on 14 times estimated earnings, a pretty undemanding multiple. UPS is on almost 18 times.
The company is guiding for at least 1.4 billion euros of free cash flow in 2017, less than in 2015. A better performance might offer reassurance that parcel growth is worth paying for. For now, Deutsche Post looks like it can afford a bit of princely largesse.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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