Why I’d shun the Royal Mail share price and pile into this FTSE 250 share instead

I reckon this vibrant success story will knock the spots off lacklustre Royal Mail Group plc (LON: RMG)

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When Royal Mail Group (LSE: RMG) first arrived on the stock market at the end of 2013, I was unenthusiastic about the shares. To me, the firm’s declining letter post service and its parcel delivery operations seemed unattractive as a business. The letter service saddled the firm with obligations to deliver countrywide and the parcels service operated in an over-supplied and cutthroat competitive environment.

Yet after the Initial Public Offering (IPO), the shares shot up and I was left scratching my head and agreeing with Thomson Reuters which issued the headline ‘Royal Mail’s soaring shares defy logic’. That article went on to say” The newly privatised British postal service is an unlikely candidate for irrational exuberance. The nearly 500-year-old outfit has turned itself round but growth prospects are at best pedestrian.” 

Disappointing performance

Needless to say, I agreed with the journalist who wrote the article and still hold a similar view about the firm’s ongoing prospects. You only have to look at the share-price chart since 2013 to see how disappointing a long-term approach to holding the stock has been for investors so far, and the firm’s record on earnings is grim – annual earnings have fallen as often as they have risen each year.

The outlook for earnings is lacklustre, so I’m sticking to my policy of avoiding the shares even though the dividend yield runs at a tempting-looking 5% or so. Instead, I think recruitment company Hays (LSE: HAS) has much better prospects and today’s full-year results are encouraging. Net fees came in 12% higher than last year, cash generated from operations rose 12% and earnings per share shot up 18%. The directors underlined their confidence in the outlook by pushing up the core full-year dividend 18% and by authorising a special dividend 18% higher than last year’s.

Robust demand

With economies around the world in pretty good shape, the demand for recruitment services is robust judging by the firm’s growth figures. Operating profit moved 15% higher “driven by strong growth in our International businesses.” Most geographies posted double-digit net fee gains in the mid-to-high teens, and chief executive Alistair Cox said in the report, we are well-positioned to capitalise on the growth opportunities identified in our 2022 plan.”

The firm’s geographic reach seems wide and well diversified. During the year, 35% of operating profit from continuing operations came from Germany, 29% from Australia & New Zealand, 19% from the UK & Ireland, and 17% from the rest of the world. So, any economic wobbles we might be seeing because of the Brexit process here in Britain are being offset by brisk trading elsewhere.

There’s a clear agenda for growth and during the year, the firm’s investments included an 8% increase in the headcount of consultants. On top of that, three new offices opened in Germany and four in the rest of the world. I reckon there’s more to come for investors from this success story and the share is well worth your research time 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.

Kevin Godbold 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.

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