Royal Mail (LSE: RMG) has dominated the investing headlines in recent days, and so far it’s been a pretty sweet story for the estimated 93,000 private investors who received shares in the flotation. After floating at just 330p per share, Royal Mail shares are currently worth 489p — a healthy 48% profit in just over a week.
As a Fool, I wouldn’t normally advocate short-term trading, but in this case, I reckon it might be time to cash in your gains and walk away with a smile. Here are three financial reasons to consider selling today.
1. Future property gains are already priced in
Royal Mail watchers reckon that three central London properties earmarked for sale by the company are drastically undervalued on Royal Mail’s balance sheet, creating hidden value.
The properties — in Paddington, Farringdon Road and Nine Elms — could be worth around £1.2bn, based on the £120m Royal Mail received when it sold a site on Oxford Street two years ago. That equates to 120p per share. But 330p + 120p is still only 450p, which is below the current Royal Mail share price.
2. Not really that profitable
Royal Mail’s restructuring over the last couple of years has seen it cut more than 30,000 employees from its payroll, and profits have risen. However, the firm’s operating margin was just 3.9% last year, and over the last three years, it has managed to deliver operating profits of just £498m on turnover of £26.5bn. That equates to an average operating margin of just 1.8%.
Given that Royal Mail appears to be about to enter strike season in the run up to Christmas, I wouldn’t bet against some extra costs that will make a dent in the Mail’s slim margins over the next three months.
3. The honeymoon will soon be over
At the moment, investors are giving Royal Mail the benefit of the doubt. The firm’s undervalued property portfolio is fully-priced into the stock and investors are shrugging off the risk of industrial action — something that postal unions have repeatedly shown themselves to be in favour of in recent years.
I reckon that even a small disappointment could deliver a shock to Royal Mail’s share price, so if you want to continue holding Royal Mail’s shares for their potential high yield, you need to be committed for the long term.
