2022 hasn’t proved a year to celebrate so far for Royal Mail (LSE: RMG), its share price or its investors.
The 500-year-old courier has fallen 40% in value since the beginning of the year. This has in turn led to its imminent demotion from the FTSE 100.
Recent weakness however means that Royal Mail’s share price still packs plenty of value. The soon-to-be FTSE 250 business trades on a forward price-to-earnings (P/E) ratio of 7.2 times. It also carries a meaty 7.1% dividend yield, one that beats the 2.6% FTSE 250 forward average comfortably.
Dangers to Royal Mail’s share price
It’s certainly true that many UK shares have low valuations due to a variety of dangers. And I can’t argue that Royal Mail has its share of problems today.
Some of the things that are discouraging me from dip-buying Royal Mail’s shares include:
- The threat of global recession. Royal Mail could see a sharp slowdown in letters and parcels traffic if economic conditions slump. The danger is particularly high following the firm’s decision to hike stamp prices in mid-May due to inflationary pressures.
- Potential strike action. Industrial walkouts have long been a problem for Royal Mail. And the courier is in a particularly sticky situation today as the Communication Workers Union demands large pay rises for UK staff in response to soaring inflation (Royal Mail has offered a 2% basic increase and a 1.5% rise related to changing working patterns). The business faces a large rise in labour costs or a nationwide strike.
- Possible regulatory action. Ofcom has announced it’s investigating Royal Mail over poor delivery rates in 2021/2022. Just 81.8% of first-class mail was delivered on time in the period, for example, some way off a required 93%. More heavy fines could be coming down the pipe for the courier.
Cheap but risky
In theory there are things to like about Royal Mail too. In particular I think it could thrive over the long term as e-commerce grows and parcel volumes increase. This is why I myself invested in Clipper Logistics (which has since been taken over by US operator GXO Logistics).
I also liked Royal Mail because of the steps it’s taken to build its geographical footprint. Through its GLS division the company also operates across much of mainland Europe and in North America. This gives Royal Mail extra growth opportunities and reduces the firm’s reliance on the UK.
However, the problems at the firm are stacking up fast. And as a consequence this is now a UK share I’m happy to avoid.
Sure, firm has enormous opportunity as online shopping continues to grow. But Royal Mail has massive competitive pressures to overcome in all its markets. It faces huge rises in costs too, including large restructuring-related expenses. And these are on top of the dangers I described earlier in the piece.
I think the Royal Mail share price could sink much further. So I’d be happier buying other UK shares right now.
