Some £200m will be spent on a buyback of shares while £200m will be given as a special dividend, the company confirmed. It made the decision as it hailed a structural shift in the parcel division.
The group told investors: “We believe the Covid-19 pandemic resulted in a structural shift, with a permanent step up in the level of parcel volumes compared to pre-pandemic levels, driven by increased online e-commerce activity.”
It comes as group revenues jumped from £5.7 billion to £6.1bn and pre-tax profits rose from £17m to £315m in the six months to September 26 compared with the same period a year earlier.
As a result of the changes, Royal Mail said it expects to be debt-free over the next two years, with net debt being cut from £1bn to £540m in the past year alone.
The interim results revealed that domestic parcel volumes increased 33 per cent compared to pre-Covid levels. However, increased customs processing and reduced air freight capacity saw international parcel volumes fall by 37 per cent.
But the group managed to increase profit margins, meaning that while the number of packages being shipped fell, the amount of revenue for parcels grew by 33.6 per cent.
Letter sending started to recover since the pandemic lows and was up 11 per cent on a year ago, but remains down 19 per cent on a two-year basis.
Nicholas Hyett, equity analyst at financial services group Hargreaves Lansdown, said: “The pace of Royal Mail’s turnaround has hugely impressed, leaving the group in very real danger of becoming an attractive business.
“It would be easy to put the current windfall down simply to the effect of the pandemic on parcel demand. And that has played a part.
“But ramping up facilities to cope with the extra demand is no small achievement, and a quick glance under the hood shows a business which is in far better shape than before the pandemic.
“Overall the group is driving higher volumes with lower costs – doing wonders for margins.”
John Moore, senior investment manager at wealth management firm Brewin Dolphin, said: “Trading has been strong for Royal Mail. Debt has more or less been halved in the last 12 months, while profitability has grown significantly and cashflow is solid.
“Despite well understood cost pressures, the management team seems confident enough to boost shareholder returns through the share buyback programme coupled with a special dividend. This may go some way towards offsetting the share price decline of around one-quarter from recent highs.”
Richard Hunter, head of markets at Interactive Investor, noted: “Even though the positive effects of the pandemic on parcel deliveries are subsiding, the tailwind from the switch to online shopping increasingly looks like it is here to stay.
“Even so, there are some pressures to follow, such as the increase in National Insurance contributions and the unwinding of its fuel and energy hedges.”