September has been a very good month indeed for shareholders of Royal Mail (LSE: RMG). For example, Wednesday saw the shares leap more than 5% in a single trading session. So what’s going well at the company and why the leap in its share price?
Royal Mail shareholders have suffered since 2018
Royal Mail shares were listed on the London Stock Exchange at 330p in October 2013, with 10% of these given to employees at no cost. They quickly took off, peaking above 600p by January 2014. They then steadily declined below 400p, before soaring to 631p on 11 May 2018.
However, since mid-2018, it’s been a tough couple of years for long-suffering Royal Mail shareholders. The share price headed inexorably south, crashing to a low of 118.86p on 16 March. That’s a crushing fall of more than 80% in under two years.
Royal Mail shares soar, doubling from their low
On 7 September (just over a week ago), Royal Mail shares were plodding along at 174.6p. That’s a bounce-back of almost half from their March low.
But at Wednesday’s close, the share price stood at 242.3p, up 12.3p (or 5.35%) on modest trading volume. Furthermore, over the past year, Royal Mail shares are up almost 6%. That’s a very respectable performance, especially given the economic havoc wreaked by Covid-19.
What’s the tale at Royal Mail?
Right now, Royal Mail shares stand just 6.3% below their 52-week high of 258.6p, set on 13 December last year. That’s pretty good, considering the awful state of the British economy.
The reason for the recent rise is simple: it released a surprisingly positive trading update on 8 September. And what did we learn? In the five months to 30 August:
* Parcel volumes were up 34% (177 million more parcels) and revenue up 33.1% year-on-year.
* Addressed letter volumes (excluding elections) were down 28% (1.1 billion fewer letters), This pushed letter revenue down 21.5%.
* But total revenue rose by £139 million.
Obviously, letter-writing is in decline, while the UK’s online shopping boom is fuelling parcel deliveries. Even so, these upbeat results came as a surprise to investors. Hence, Royal Mail’s share price jumped by almost a quarter on the day of the update – their biggest-ever one-day gain.
What would I do with this FTSE 250 share?
As a 504-year-old organisation, Royal Mail is a household name with an easily understood business model. But its legacy businesses and processes are weighing on its productivity, so it needs to adapt and modernise to survive. It plans to slash 2,000 management jobs to save £130m and reduce capital expenditure by £250m. The company also faces a new regulatory framework from Ofcom in 2022.
As I write, Royal Mail is worth £2.3bn, which seems a modest valuation for a near-monopoly player. Its shares trade on a price-to-earnings ratio of 14.28, for an earnings yield of exactly 7%. There’s no dividend at present, but it should return in 2020/21.
In my view as a veteran value investor, Royal Mail shares are in a sort of limbo. They’re not so cheap as to be a bargain buy and equally, they’re not obviously overpriced. But when this FTSE 250 company restores its dividend, they could well find favour with income-seeking investors. I may not be a buyer today, but if I were a current shareholder, I would feel happier than for two years. I’d sit tight and hold on to the shares to see what the future holds!
