What’s going on with the Royal Mail share price?

The Royal Mail share price has tumbled in the past year and now looks attractive on some valuation metrics. So why isn’t Christopher Ruane buying?

| 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.

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

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.

With its post and logistics experience, Royal Mail (LSE: RMG) is used to moving things long distances. But in the past year, the Royal Mail share price has also moved a long way – in the wrong direction. It has fallen 44%.

On a surface level, that might look like a buying opportunity for my portfolio. After all, the company has a dividend yield close to 6%. It also enjoys a strong position in its markets, especially when it comes to the UK postal service. But shares do not lose 44% of their value for no reason. What is going on?

Bleak outlook

One way to look at some businesses is to ask, if they did not already exist, would you invent them today? For example, while I think new discount retailers and online sellers will emerge in coming years, I would be surprised if anyone bothers making the effort to establish a new supermarket group to rival the likes of Tesco.

I feel a bit like that about Royal Mail as a company, which consists of two divisions. Its UK mail division is set to suffer from a long-term structural decline in demand. But it still has costly service obligations that reflect its key role in national life, even as mail volumes go down. More positively, its logistics division is in a business area that could see further high growth in years to come. But that has attracted lots of competition, putting pressure on profit margins across the industry.

If I had a blank slate to design my dream business, I would not come up with either of those two operations. I also would not try and run them as a single company.

Royal Mail investment case

But there is a counterargument to what I see as the unattractiveness of Royal Mail in its current form.

Even though mail volumes are declining, they remain substantial. Volumes in the most recent quarter fell 6% compared to the same period the year before. But the business still handled 1.9bn pieces of mail.

The company has pricing power. As a letter writer, recent stamp price increases have seemed excessive to me. But from a business perspective, it may mean that, like tobacco companies, Royal Mail can make profits even while volumes decline.

In the logistics business, revenues for the quarter grew by 8% compared to the prior-year period. An operating profit of £94m for the three months suggests the division is ably handling the challenge of profitability in logistics.

On top of that, the company has floated the possibility of breaking the company into two separate firms.

My move on the Royal Mail share price

So with its juicy yield and price-to-earnings ratio of just five, could buying at today’s Royal Mail share price deliver an attractive opportunity for me?

I am not confident that it would. It might do, as the company has a strong market position in mail and deep logistics experience. But just as a rising tide lifts all boats, an ebbing tide can lower all crafts. Royal Mail is operating in markets that look set to see one challenging year after another.

I think I can invest in more attractive businesses that have the wind in their sails — and their sales.

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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 »