FTSE 100 shares rarely make my best shares to buy now watchlist. But there is one £5bn+ company that has shot to the top recently.
Growth is usually at a premium for blue-chip giants. But the FTSE 100 company in my best shares to buy now file has produced some pretty epic operating profit growth.
Cash machines
My best shares to buy now often have high operating profit growth. Why? Well, to me, it is a much more useful way of valuing a business than using headline or gross profit. Say my company sells 1m widgets a year at £10 a go. My production costs are £5 per widget. Gross profit would be £5m. But that doesn’t account for all the other costs of doing business, like marketing the widgets for sale, doing R&D on the hot new trends in widgets, paying for staff, expanding into new markets and everything else you can imagine.
After all that, my company could be making a loss for the year. It certainly wouldn’t make anyone’s best shares to buy now list! If a business has good operating profit growth, I know it is not only selling a decent amount of its product but also has a firm hand on controlling costs. To me, that suggests sustainable growth over the longer term.
Going postal
Honestly, I never thought I’d have Royal Mail (LSE:RMG) on list of my best shares to buy now. This time last year, the FTSE 100 postal service was at the bottom of a two-year share price decline under CEO Rico Back. It had plummented from 559p to 126p.
Former Ocado exec Simon Thompson took the top spot in January 2021 and has had an immediate impact.
Profits soared in the pandemic, up 116% in the year to 28 March 2021, as it won government contracts to deliver coronavirus testing kits. And operating profit growth? Up 416%.
The obvious risk for its status as one of my best shares to buy now is if Thompson can’t keep a good thing going. I find it unlikely that everyone will use Royal Mail to the same extent as during a global pandemic. I think there will be some residual growth, however. My elderly parents started shopping online for the first time last year and won’t give up that convenience now. I see that being replicated throughout the UK, to some extent.
Spruced up
Many have tried and failed to modernise this over 500-year old institution. Thompson’s move is to build new automated parcel sorting hubs. The first, in Warrington, will open in 2022. The second, an 840,000 sq ft behemoth near Northampton is slated for 2023. While they could improve efficiency, these will be massive capital costs, which could hurt profitability.
In May 2021 the business started paying dividends again at 10p per share. A progressive policy means it has committed to 20p a share from next year. Again, these are costs that could hurt if the pandemic profit bonanza doesn’t last.
Royal Mail also operates in a world where its rivals like UPS, Fedex, and Amazon all appear to have more nimble business models. So this is a contrarian pick! While it’s one of my best shares to buy now, it may not be one I hold forever. If I buy, I’ll keep watching it like a hawk for any signs of long-term trouble.
