Why is the Royal Mail share price falling?

Shares in Royal Mail have underperformed over the last 12 months. Here, Edward Sheldon looks at what’s going on.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Stack of one pound coins falling over

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Royal Mail (LSE: RMG) shares have had a poor run recently. A year ago, the RMG share price was hovering around the 500p mark. Today however, it’s at 325p.

So why is the Royal Mail share price falling? And has this big decline provided a buying opportunity for me?

Why Royal Mail shares have tanked

In my view, the big share price fall here is down to a combination of factors. The first is weaker parcel volumes.

During the pandemic, Royal Mail saw parcel volumes explode on the back of the boom in online shopping and high demand for Covid-19 test kits. However, recently, e-commerce sales have dipped as physical stores have reopened and people have stopped ordering test kits, impacting the company. In the last quarter of calendar 2021, for example, domestic parcel revenue was down 5% year-on-year.

The second is inflation. In its last update, the company said it was seeing upward pressure on costs. This is likely to hit profits in the near term.

Analysts at Citigroup forecast 5% wage inflation and 6% inflation in non-personnel costs to hit results for this financial year (ending 28 March 2023). As a result of spiralling costs, analysts are reducing their earnings forecasts for this year. Over the last three months, the consensus forecast for FY2023 earnings per share (EPS) has fallen by about 14%.

A third factor is weaker economic conditions. This could hit consumer demand in the near term. This, in turn, could translate to lower parcel volumes.

Finally, broker sentiment towards RMG shares has really deteriorated this year. In March, for example, Deutsche Bank downgraded the stock to ‘sell’ from ‘buy’, while Credit Suisse cut it to ‘underperform’ from ‘neutral’. More recently, analysts at Barclays cut their price target by a whopping 38% to 400p. This kind of broker activity will have put a lot of pressure on the share price.

Should I buy Royal Mail shares now?

So is the stock worth buying after the recent pullback? Well, it certainly looks cheap. With analysts expecting EPS of 53.6p for this financial year, the forward-looking P/E ratio is just six.

That valuation does seem low. If business conditions improve, the stock could potentially see a rerating, where the share price rises as investors are willing to pay a higher valuation for it.

Meanwhile, there could be some big dividends on the table here. For FY2023, analysts expect the group to pay out 7p per share in dividends. At the current share price, that equates to a yield of around 7%.

However, one thing that turns me off this stock is its patchy track record. In the past, its profits have fluctuated a lot. And so have its dividend payments. In recent years, it has cut its payout.

Another thing I don’t like here is the low level of profitability. In the past, Royal Mail has not generated a high return on its capital. Companies that generate low returns often turn out to be poor investments as they don’t grow much over the long run.

Weighing everything up, I think there are better stocks to buy today.

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.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

More on Investing Articles

Investing Articles

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing Articles

2 top shares I’ve bought for my Stocks and Shares ISA in November

This writer reveals a pair of fast-growing businesses that he's recently added to his Stocks and Shares ISA for the…

Read more »