Royal Mail shares have soared 10% in 1 month. Here’s what I’m doing

Royal Mail shares have been a winner of the pandemic but should I buy? Here’s my take on the stock.

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I recently changed my mind about Royal Mail (LSE: RMG) shares. I’ve become bullish on the stock and after it’s trading update on Wednesday, I’d buy it in my portfolio.

To me, the trading update was positive especially after it increased its full-year expectations. I reckon it’s worth taking another look at Royal Mail shares.

Online shopping boom

I don’t think it’s a surprise that Royal Mail has experienced a boom in parcel volumes. This has really been the driving force in the share price rally. Consumers turned online for Black Friday and Christmas shopping last year.

But I think this is to be expected especially when the lockdown restrictions meant that shops were temporarily closed. And in many cases, it was difficult, due to government restrictions, to physically give gifts to members of family and friends in other households.

Parcel volume has also overtaken letter volumes. Again, I don’t think there’s any surprise there. I reckon letters are in a long-term decline and Royal Mail is right to be focusing on its parcel business.

Trading update

There are a few things I think are notable about Royal Mail’s trading update. Growth in parcels remains strong. But I should stress the big upgrades in full-year revenue and operating profit.

Royal Mail’s management now thinks full-year sales will rise £900m year-on-year compared to the previous £380m–£580m it expected. It also believes the operating profit to be £700m versus guidance of over £500m.

To me these are huge upgrades, which should be positive for Royal Mail shares. There’s no doubt in my mind that the festive period last year was transformational for the company. But a part of me can’t help but wonder what will happen when the lockdown parcel surge subsides.

Capital investment

I reckon the e-commerce trend will continue after the pandemic. And Royal Mail thinks it will too. The company is boosting its parcel infrastructure with a fully-automated parcel hub in the Midlands.

I’ve previously mentioned that Royal Mail lacked infrastructure so it’s pleasing to see that this new hub will process over one million parcels per day. I reckon this will help the company maintain delivery times.

Union members

I should mention that the landmark agreement between Royal Mail and union members changed my mind. I think this was a milestone for the company. For now, I’d buy the stock as both parties are working together to implement the changes across the business.

The risks

While there is a parcel volume surge, there’s no guarantee this will continue. Especially once the lockdown is over.

Boosting infrastructure comes at a cost, which could impact profitability. I reckon Royal Mail shares are also sensitive to any setbacks in implementing change across the business. Another dispute with union members may hit the stock.

I reckon the company is taking the right steps. I’d buy Royal Mail shares now in my portfolio based on the long-term prospects. It’s due to report full-year results on 20 May with a pre-close announcement on 30 March. I think the reinstatement of its full dividend could be possible.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Nadia Yaqub 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.

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