Since 2017, Royal Mail (LSE:RMG) has increased its revenues by 30%, its operating income by 51%, and its earnings per share by 125%. But if I’d bought Royal Mail shares five years ago, how much would I have made?
Share price
To start with, it’s worth noting that the Royal Mail share price is significantly lower than it was five years ago. At the start of October 2017, the stock traded at a price of £3.78 per share.
Today, shares trade at £1.84. That’s a decline of over 50%, meaning that if I’d invested £1,000 in the stock five years ago, I could sell it today for around £487.40.
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That’s not a particularly impressive return. But there are two reasons why I don’t think this is a good way to measure the success of an investment in Royal Mail.
There are two reasons for this. First, as Warren Buffett says, making an investment isn’t about trying to determine what is going to happen to the price of a stock — it’s about trying to figure out how much cash a business is going to produce.
The other reason is that Royal Mail has paid out significant dividends to shareholders. Simply considering the price of the stock today ignores the cash that I would have received as a shareholder if I’d bought the stock five years ago.
Dividends
Five years ago, £1,000 invested in Royal Mail shares would have bought me 264 shares. Since then, the company has paid out dividends totalling £1.06 per share to its owners.
That means that I’d have received around £280 in dividends — an average annual return of 5.6%. Adding that to my £487.40 takes my total return to £767, implying a loss of £233 on my original £1,000 investment.
Even that isn’t the full story, though. I could have reinvested my dividends as I’d received them.
Doing this would have both increased my investment in Royal Mail and boosted my dividend income. If I’d reinvested my dividends, I’d now have 359 shares and would have received £321 in dividends.
To me, that’s the real story of what I’d have if I’d invested £1,000 in Royal Mail shares — an asset that currently generates £71 annually. I could sell that asset for £662 if I wanted to, but that’s not really what I think investing is about.
Royal Mail shares
Today, £1,000 in Royal Mail shares would get me 542 shares. My investment would pay £108 in dividends each year.
Royal Mail might have fallen out of the FTSE 100 recently. But I’d do better investing £1,000 into the company today than I would have five years ago.
