Courier International Distribution Services (LSE:IDS) shocked investors in November when it cancelled the interim dividend. The FTSE 100 stock, formerly known as Royal Mail, has long been a go-to stock for UK dividend chasers.
But now the dust has settled, some investors are buying the business again for big dividends. City analysts think IDS will still pay a final dividend of 12.5p per share in this financial year (to March). This leaves the company with a large 5.6% forward dividend yield.
Things get even better for next year too. For fiscal 2024, a predicted 13.9p per share reward drives the yield to 6.2%. This is far above the FTSE index forward average of 3.6%.
I’m not convinced by current payout forecasts however. The FTSE 100 company is expected to record a hefty loss in the current financial period. And it doesn’t have a strong balance sheet to help it pay decent dividends during these tough times. Net debt was £1.5bn as of September.
A FTSE stock to avoid?
In fact, I wouldn’t touch IDS shares with a bargepole. As a long-term investor, I believe the steady growth of e-commerce offers excellent opportunities for couriers. But this particular operator is fighting too many fires for my liking.
The business recorded an operating loss of £295m in the nine months to December as parcel and letter volumes dropped. Demand for its services is likely to remain weak as the UK languishes in recession too. And its balance sheet therefore should remain under considerable strain.
Industrial action at Royal Mail also contributed to IDS’s heavy nine-month loss. Worker strikes resulted in a whopping £200m loss for the period and, worryingly, the bitter dispute looks set to run on and on.
This week, the Communication Workers Union announced it would re-ballot members on further walkouts over pay and conditions. An overwhelming 97.6% of them voted for industrial action the last time a count was held in the summer.
Huge costs
As I say, the commercial transport sector has enormous opportunities as online shopping becomes more popular. Analysts at ReportLinker believe the global courier, express and parcel market will expand at a compound annual growth rate of 10.3% between 2021 and 2027.
However, International Distribution Systems is having to spend a fortune on parcel machines and other hardware to capitalise on this opportunity. This is also taking a big bite of earnings.
Royal Mail’s capital expenditure in areas like automation and packages hubs was £63m in the six months to September. That was on top of other heavy spending IDS is making at its UK division and its GLS global unit. The company will have to overcome increasing competitive pressures to make these investments count too.
On paper, IDS shares look like a great investment for dividend investors. But I think there are much better FTSE 100 income stocks out there for me to buy.
The post 6.2% yield! Should I buy this FTSE dividend stock for passive income? appeared first on The Motley Fool UK.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.