Royal Mail shares are near all-time lows. Here’s what I’d do now

Royal Mail (LON: RMG) shares just continue to fall. What’s the best move now?

| 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 last time I covered Royal Mail (LSE: RMG) shares on 22 November, they were changing hands for around 200p. At the time, the FTSE 250 company had just issued a disappointing set of half-year results, and I said that “looking at the challenges the business is facing, I just don’t think the shares are worth the risk” and that I was “steering clear.”

Fast forward to today, and the shares are now trading at around 176p – about 12% lower than they were in November – so avoiding the stock was clearly the right move. Here, I’ll explain why the stock has continued to fall and what I’d do now.

Disappointing trading update

One reason Royal Mail shares have underperformed recently is that the group released a disappointing trading update for the nine-month period to 29 December 2019 last week. While revenue for the period was up 3.7%, and the company said that 2019-2020 group operating profit is likely to be between £300m and £340m (in line with expectations) there were several things in the update that the market didn’t like.

For example, RMG advised that the outlook for 2020-2021 is “challenging”. It also said that the ongoing industrial relations environment and delays to its transformation plan, combined with continuing economic uncertainty, increase “the likelihood” that the UK parcels, international and letters (UKPIL) business will be loss-making in 2020-21.

In addition, the group stated: “Unless we are able to make significant progress in delivering our transformation plan, our ability to meet the year 3 targets of our Journey 2024 plan will be compromised.” Overall, the trading update was not very encouraging.

Analyst sentiment

Another reason RMG shares have fallen recently is that they are still very much out of favour with analysts. 

For example, just last week, analysts at Berenberg downgraded RMG from ‘hold’ to ‘sell’, stating that the company is facing challenges from trends in the postal sector such as letter volume declines. Meanwhile, analysts at Jefferies have an ‘underperform’ rating on the stock, on the back of deteriorating letter and parcel volume trends, increasing competition from Amazon Logistics, and rising wage inflation.

Overall, of the 12 brokers following the stock, four have it as a ‘strong sell’, three have it as a ‘sell’, three have it as a ‘hold’ and only two have it as a ‘buy’. And over the last month, the consensus earnings per share forecast for the 2020-2021 year has fallen about 10%. This will have contributed to the share price decline.

What I’d do now

Looking at last week’s trading update, my view on RMG remains the same as it was in November – I think the shares are not worth the risk.

Yes, the stock is cheap. The forward P/E ratio is just 8.3, compared to the FTSE 250 median of 15.5. And yes, the dividend yield is high. Currently, the prospective yield is 8.4%. Yet this is a company that is facing significant challenges right now, so it has a low valuation and a high yield for a reason. 

All things considered, I believe there are much better stocks to buy right now.

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.

Edward Sheldon has no position in any shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. 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 »