Royal Mail Group (LSE: RMG) is one of the top stock market success stories of the pandemic. Since the wider stock market crash kicked off in February 2020, the Royal Mail share price has more than trebled. That includes its latest boost, with news the company is poised to enter the FTSE 100.
Even if we just look at the share price so far in 2021, we see a 75% climb. It really looks like the firm has won back the hearts of investors. But is it too late to profit from the resurgence?
Well, looking at share prices over short periods can be deceptive. And I find it sobering to think that Royal Mail shares are still lower than at their peak in 2018. Oh, and they’re still below an early post-flotation high in January 2014 too.
What makes the recent gains look so good is the truly woeful performance of the Royal Mail share price from 2018 to the depths of 2020. From high to low, the shares shed a whopping 80% of their value. It came as the company struggled with increasing competition, and industrial relations with its highly unionised workforce. Still, the shift towards parcels as the key profit generator is turning things round.
Profits doubled
For the year to 28 March, revenue climbed by 17%, and adjusted operating profit soared by 116%. Cashflow was stronger too, up 37%. And that’s helped address one my my least favourite aspects of any company’s accounts, debt.
RM’s net debt fell from just over £1.1bn at March 2020, to £457m. That’s well below the year’s operating profit, and of no concern to me at all. Incidentally, since the day of the results, the Royal Mail share price is up 13%, so the figures went down well.
Chief executive Simon Thompson pointed out that it was a year of “remarkable change” at Royal Mail, and he’s certainly right there. He added: “We have learnt that we can deliver results and change at lightning pace when we are united by a common purpose.”
And when a pandemic drops an increase in business in your laps. We mustn’t forget that part.
Royal Mail share price valuation
What are the risks of buying now? How much of this year’s bumper results was down to truly fundamental improvements? And how much was a one-off due to the pandemic? There are clearly contributions from both. And I do think we’re looking at positive long-term change here. But, at this point, I can’t quantify the answers.
Crucial to any decision, what has happened to the Royal Mail share price valuation? On today’s share price, the latest figures give us a trailing P/E of approximately 9.5. That sounds cheap, but what about dividends? Well, the outlook seems promising. Royal Mail is paying a one-off 10p final dividend for 2020-21, and has 20p per share marked down for 2021-22. That’s a yield of approximately 3.4%, and not a bad start.
Despite this apparently attractive valuation, I’m going to hold off. The competition is still there and growing, and Royal Mail is lagging a little in technology. I feel we could still see a volatile Royal Mail share price over the next few years.
