Royal Mail vs SSE: Which falling share price should I buy?

The Royal Mail and SSE share prices have been falling recently. Should you invest in both or is one a value trap?

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Royal Mail (LSE: RMG) shares have lost 45% of their value since November 2018 and haven’t been performing well at all this year. However, the high dividend yield and low price could tempt many investors into buying.

Likewise, SSE (LSE: SSE) has also seen its share price fall. In the past three years it’s dropped 26%. Having said this, could it now be back on the rise?

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I’m going to take a look at both companies to understand why they could be undervalued and whether they are worth investing in.

Daylight robbery?

Currently, Royal Mail shares are incredibly cheap after consistently dropping in value throughout the years. The shares did benefit from a 3% rise in September but they are still down 5.8% since the end of August.

However, if you look at the fundamentals, Royal Mail shares still look incredibly attractive, so is it just harshly undervalued? With a forecast dividend yield of 7.4% and a price-to-earnings ratio of under 9, it appears to be screaming buy. So, why aren’t investors cashing in, and what’s causing such a low valuation?

If we take a closer look at Royal Mail in terms of its earnings, it’s easy to see that there are some concerns. Earnings per share are projected to fall a staggering 49% in 2020. This is after a decline of 45% already in 2019. Furthermore, the projected dividend will only be covered 1.5 times by forecast earnings. This is far from comfortable when the company is suffering from cash flow problems.

Royal Mail is very aware of the potentially dire situation that it’s currently in and plans to invest around £1.8bn in its UK business over the next five years. However, this might not be enough to turn everything around and it could be too late, considering the rate shares are dropping.

Taking everything into account, it appears to me that Royal Mail is deserving of its low valuation. For now, I think that its’s worth staying away from this stock.

Looking better

On the other hand, I think that SSE could bring investors great rewards. While the share has been falling, it’s up 15% from its July lows. In September, it revealed a $500m deal to sell its retail business to rival OVO Energy. This will really help the company to pay off some of its debt and reinvest into the business.

The current dividend yield of 6.6% is very tempting, and I feel that it’s much more reliable than Royal Mail’s dividend. Furthermore, I think that SSE has a great business plan moving forward, focusing much more on renewable energy as people begin searching for alternatives to gas and oil. The company appears to be well-positioned to benefit from the UK’s gradual transition to low-carbon energy.

The sustainable business plan, million-dollar deal with OVO Energy and the high dividend make SSE a buy for me.

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fional 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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