Royal Mail has reported a rise in underlying annual profits as a squeeze on costs helped offset a lower than expected performance from its parcel business.

Adjusted operating profit before transformation costs was up six per cent to £740m for the year to the end of March. Including pension accounting charges, the figure was nine per cent lower at £611m.

Chief executive Moya Greeene said operating profits were in line with expectations.

She added: "Our continued focus on efficiency resulted in a better than expected UK cost performance, offsetting lower than anticipated UK parcel revenue.

"At the same time we have delivered a large number of innovations at pace as we transform our business.

"Our trading environment remains challenging, but we are now poised to step up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs."

She said trading in the current financial year was in line with expectations but overall performance would be dependent on the crucial Christmas period.

The full-year dividend for shareholders is to rise by five per cent to 21p.

Ms Greene said it had been a challenging year and highlighted the threat posed by the roll-out of Amazon's delivery network, which is expected to have an impact on Royal Mail's targets for parcel delivery growth.

The results come after the demise of rivals Whistl and City Link.

The chief executive said: "The parcels and letters markets in the UK remain highly competitive."

Royal Mail said its UK business saw flat revenues at £7.76 billion, with underlying profits up one per cent to £615m.

There was a one per cent decline in letters and growth of one per cent in parcels, reflecting the competitive market, the group added.

Parcel volumes were up by three per cent, with a better performance in the second half, while addressed letters were down four per cent, though the group said this was "at the better end of our forecast range".

During the year, the group has cut the number of employees in the UK business by 5,500.

Royal Mail said its management reorganisation programme delivered cost benefits of £42m, and it was expected to deliver savings of £80m a year from 2015/16.

Revenues at its GLS business, operating in Europe and the Republic of Ireland, grew seven per cent to £1.65bn, with underlying profits up six per cent to £115m.

Ms Greene said eligible full-time employees who had received an allocation of 729 free shares were in line to have received £250 in dividend payments by the end of July.

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said: "Royal Mail has posted numbers which indicate measured progress in a treacherous environment.

"Whilst the exit of both City Link and Whistl may have removed some of the competition, it also serves to underline how tough this sector can be.

"Meanwhile, the competitive threat of Amazon looms large, with Royal Mail recognising that there will be an impact to its business."

Dave Ward, general secretary-elect of the Communication Workers Union, said: "These results have been delivered by improving productivity and the hard of work of postal workers. Those workers have shown they have supported the need to change to build growth in the business.

"I am calling on Royal Mail to show they have the same drive and commitment for growth and innovation and call on them to work with CWU to deliver it.

"However, we also recognise the note of caution that there remains a structural decline in the letters market of 4%. Therefore, the union again calls on the regulator Ofcom to recognise this clear fact and to stop blindly increasing the competition in the sector."