I’m out shopping for shares again. Should I buy Royal Mail (LSE: RMG)?
Post haste
As I’m living overseas right now, I was locked out of the Royal Mail privatisation. So I could only watch in frustration as the shares leapt 40% on the first day of trading. I couldn’t join in the flotation fun, but I am free to trade its shares. So is now a good time to buy Royal Mail?
Priced at 330p, peaking at 455p, Royal Mail shares were both undervalued and oversubscribed at launch. But are they overvalued today? After such a dramatic opening day, there is every chance. They are up another 3% to 469p by Monday lunchtime, and my first instinct is to bide my time.
First, I suspect we might see a dip on Tuesday, when the shares go “unconditional” and small investors who bought direct from Royal Mail are free to sell. Some 690,000 ordinary investors who were each allocated £750 of stock are now sitting on a gain of around £320, which may prove too juicy for many to resist, especially with Christmas around the corner. More experienced investors, including a few Fools, could scornfully chuck the stock back as a “tiddler”. Broker TD Direct Investing reports that 89% of its clients who are trading are selling, and only 11% buying. I suspect it will be some time before the share price settles down. Right now, I think it’s more likely to fall than rise. And here’s another reason.
Strike out!
Every great party is usually followed by a hangover. A fair degree hinges on whether staff will vote for strike action with the same enthusiasm that they trousered the free shares. A ‘no’ vote could remove a tier of uncertainty, and propel the share higher, but a sustained campaign of industrial action in the run-up to Christmas could be nasty. The ballot closes on Wednesday. Strike action could start as soon as next week. If it does, my finger will be hovering over the ‘buy’ button.
There’s another reason why I’m reluctant to buy Royal Mail shares today. At launch, they were forecast to yield between 6.1% and 7.7%, instantly making them one of the most attractive yields on the FTSE 100. The yield isn’t so compelling at today’s price, when it has dipped to around 4.3%. I will bide my time.
Mail order
Royal Mail has a long haul ahead of it. The downside is baked in: letters and junk mail volume are doomed to continue their decline. But there is nothing inevitable about the potential upside of this business, because it faces a struggle to establish itself as a global parcels business, against stiff competition. That’s why it’s important for me to buy into this stock at a realistic price, and there is nothing real at all about today’s valuation.
The quick profits from Royal Mail are gone. That doesn’t bother me, I am looking to buy this stock for the long term. As the flotation hype recedes, fast-buck merchants investors dump their stock and unions rally the troops, we should see some interesting volatility ahead. I will buy shares in Royal Mail, but not just yet. I suspect a far better buying opportunity is in the post.
