What I’d do about the Royal Mail share price right now

Royal Mail plc (LON:RMG) shares have fallen 56% in the last year, but can they recover?

| 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.

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.

The Royal Mail (LSE:RMG) share price has tanked in both the long and short term and many investors are beginning to ask the question of whether shares in the company now represent a value investment.

Shares in the mail distributor have fallen around 56% in the last year, while in the last six months alone, their value has dropped 30%.

Earlier this year, new CEO Rico Back announced that Royal Mail would cut its dividend by 40% in order to free up funds to aid its recovery.

Should you invest £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

See the 6 stocks

That inevitably led to a further sell-off, but with the ultimate aim of making the firm more stable. So where do I think the Royal Mail share price is headed in the coming months and years?

Value package?

Looking at Royal Mail’s current valuation, the company is trading with a P/E ratio of 6.5, significantly below many of its peers in the FTSE 250. That would indicate that perhaps it is undervalued, but with its earnings having been in decline for some time, I wouldn’t subscribe to that view.

Adjusted earnings per share have been on the slide, particularly in its last full financial year, falling to 30.5p from 45.5p  a year earlier. 

In its most recent quarterly earnings report, Royal Mail said first-quarter performance was in line with expectations, but it was hardly an inspiring update with operating profit for the year expected to be between £300m and £400m.

The shares took a further hit last week after analysts from JP Morgan Cazenove noted an increase in tensions between the company and the Communication Workers Union (CWU).

While the union disputes are based on several different issues, part of this is being triggered by Royal Mail’s attempts to bring its processes more in line with technological advances. 

The introduction of digital assistants and new parcel sorting strategies have led to friction among workers, and for me this represents one of the biggest challenges to face Royal Mail and its shares in the coming years.

I’m not convinced that the firm will be able to manage that progression towards more modern practices, without the added angst among workers based on potential staff reductions.

Dividend cut

It must be noted, however, that the board’s move to slash the dividend has positive intentions behind it. The added cash that this will free up should allow for more investment in key services and operations. 

As commented on by Rupert Hargreaves, for too long the dividend was prioritised above all else, even when Royal Mail badly needed investment. With the dividend yield now forecast to be just under 7%, even with the cut, there is certainly enough there to tempt some investors into making a value play on the business.

For me, however, it would be difficult to rule out a further cut to the dividend if earnings continue to fall at their current rate, which is a real possibility.

At its current price of 200p, even with a P/E ratio of just 6.5, I just don’t see enough evidence that Royal Mail can turn its fortunes around. Time will tell as to whether it can reinvest the funds from the dividend cut wisely, but there is little indication of what that will look like at this stage, so I’d stay well away.

Should you invest £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

See the 6 stocks

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.

Conor Coyle 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

Pink 3D image of the numbers '2025' growing in size
Investing Articles

An investor who put £10,000 into Shell shares at the start of the year would now have…

Harvey Jones looks at recent performance of Shell shares, and the factors that could drive the FTSE 100 stock higher…

Read more »

Investing Articles

Growth, dividends, and value! 3 top ETFs to consider for a balanced UK shares portfolio

These London-listed exchange-traded funds (ETFs) could help investors in UK shares enjoy a strong and stable return over time.

Read more »

A row of satellite radars
Investing Articles

If an investor put £10k in Rolls-Royce shares 1 week ago here’s what they’d have now

Rolls-Royce shares started this week where they left off last week Friday, by racing ahead. How much more momentum can…

Read more »

Investing Articles

An investor who put £20,000 into Barclays shares at the start of this year would already have…

Barclays shares have had a brilliant run over the last year and Harvey Jones thinks they're still worth considering as…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here’s why Tesla stock nosedived 27% in February

Hot on the heels of a flat January, Tesla stock had a truly terrible February. What on earth's going on…

Read more »

Investing Articles

£20,000 in a cash ISA? Here’s how an investor could aim to turn that into a £14,900 second income

Can someone turn £20,000 in savings into a £14,900 second income? With enough time, Stephen Wright thinks this could be…

Read more »

Investing Articles

A last-minute growth ETF to consider before next month’s ISA deadline!

With a 540%-plus price rise over nearly a decade, this ETF could be a great investment for ISA investors to…

Read more »

Investing Articles

Here’s why the BAE Systems share price just exploded 17% to an all-time high!

This writer looks at why the BAE Systems share price is up 30% so far in 2025 and asks whether…

Read more »