The Royal Mail (LSE:RMG) share price is down over 50% in the last year. The company has been challenged with rising inflation and lower delivery demand. Alongside this, the stock has now been relegated from the FTSE 100 index.
I question if the share price is set to recover. And is now the perfect time for me to invest to ride the rebound?
Current challenges for Royal Mail
During the pandemic, a rise in parcel deliveries was a lifeline for the company. However, as restrictions eased, the dependence on parcel deliveries slowly evaporated. Domestic parcel volume has already dropped 7% year on year.
Royal Mail is also highly exposed to rising inflation. Last year, personnel made up 55% of operating costs, and distribution and transportation made up 29.3%. With rising fuel costs and demands for higher wages, I would be surprised if operating costs didn’t rise over the next year.
On Tuesday, the Communications Workers Union (CWU) ran a ballot on whether to take industrial action. If this was to happen, Royal Mail would face service disruption and may be forced to take on a higher wage bill. This would lower profit margins and hurt the Royal Mail share price. We will have to wait until 19 July for the result.
Attractive fundamentals?
It is not all doom and gloom for Royal Mail shares. The company is currently trading with a price-to-earnings ratio of 4.6, which is considerably lower than the current FTSE 250 average of 15. If Royal Mail’s earnings halved and the share price remained the same, the stock would still have a P/E ratio under 10.
It is worth noting that, despite my future concerns, the current accounts for the last financial year remain relatively strong. Profit only fell 1.3% and revenues rose 0.5%. While this is nothing to write home about, it shows the majority of my concerns have yet to be financially realised.
Alongside this, Royal Mail shares currently have a solid dividend yield of just under 6%. Forecasts are suggesting this will rise above 8% in the coming years. The dividend also looks relatively stable, with only 32% of earnings being paid out as dividends. This being said, I would like to see earnings growth first before any further rise in the dividend payout.
What am I doing?
On the surface, I can see how the Royal Mail share price looks attractive. The low P/E ratio, the high and growing dividend and the considerable drop in value are all encouraging signs to me. However, I believe there are currently too many uncertain challenges facing the company for the share price to bounce back. Industrial action, rising fuel costs and lower parcel demand all cloud Royal Mail’s future. I’m holding off for the foreseeable future.
