Is the Royal Mail share price now cheap enough for investors?

The Royal Mail share price has almost halved since the turn of the year. Is now the time to buy this battered stock?

| 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 British pound coins falling on list of share prices

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.

Extreme stock market volatility in 2022 has washed out many top UK shares. But the Royal Mail (LSE: RMG) share price has performed particularly badly as investor confidence has crumbled.

The former FTSE 100 share has lost a whopping 46% of its value since the start of the year. And more share price weakness could be coming too as Britain’s economy tanks. This could cause letter and parcel volumes at the courier to tank.

A dirt-cheap UK share

That said, the Royal Mail share price does look exceptionally cheap on paper. And this could tempt many a value investor to dive in.

Today the business trades on a forward P/E ratio of just 7.2 times. Royal Mail shares also carry a mighty 7.5% dividend yield for this financial year (to March 2023). City analysts think the company will raise the full-year dividend to 20.5p per share, up from 20p last time.

Risks to Royal Mail

But is the cheap Royal Mail share price worth the gamble? Some of the things worrying me about the FTSE 250 share include:

1) Industrial action

The prospect of industrial action has always been a thorn in the side of Royal Mail.

Yet the business seems to be at a particularly worrying juncture right now. According to Chairman Keith Williams, current discussions between the company and unions have “run out of road”.

Royal Mail faces two unenviable choices. One is to accept strike action that will paralyse trading. The other is to cave and pay workers higher than the 5.5% it said it has proposed, pushing its wage bill to eye-popping levels.

Williams told The Sunday Times that even that offered 5.5% pay rise will propel the group’s £5.5bn wage bill up by £250m.

2) A slumping UK economy

Royal Mail’s operations are highly sensitive to broader economic conditions. And as I say delivery levels could start to sink as global growth slows.

I’m particularly worried about the business given its dependence on a strong UK economy. Conditions here are predicted to be particularly grim over the next 18 months (the OECD is tipping zero growth in 2023).

3) Rising competition

The growth of e-commerce means that competition in the parcel delivery market is heating up.

Royal Mail has been expanding its own global footprint though its General Logistics Systems division. The business now operates in North America as well as Europe. However, other industry giants also continue to expand rapidly.

DHL, for instance, just announced plans to create 3,500 new jobs in the UK alone.

The verdict

I like the brilliant value that Royal Mail offers. I also like its sprawling global operation and its important role in e-commerce. I think this could deliver exceptional profits growth as shopping habits change.

However, in my opinion the risks the company faces remain far too severe and numerous for my liking. For this reason, I’d rather buy other UK stocks with more solid growth prospects.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »