Royal Mail (LSE: RMG) shares had an impressive run in November. Over the course of the month, the RMG share price rose from 227p to 308p – a gain of approximately 36%.
Here, I’ll look at why Royal Mail shares have risen by so much recently. I’ll also provide my view on the stock now that it is trading at a much higher level.
Why did Royal Mail’s share price rise?
November was an eventful month for Royal Mail shares.
Early in the month, the FTSE 250 stock received a boost when analysts at JP Morgan upgraded the stock to ‘overweight’ from ‘neutral’ and raised their price target by nearly 50%. This put a rocket under RMG’s share price, with the stock having its best day in nearly two months.
Royal Mail shares then received a further boost just a few days later on 9 November when Pfizer announced that it had developed a coronavirus vaccine. This news resulted in a massive flow of money into beaten-up UK stocks. Royal Mail certainly wasn’t the only share to jump. Other popular stocks such as Lloyds Bank, Legal & General, and easyJet also rose significantly.
Then on 19 November, Royal Mail posted an encouraging set of half-year results for the period ended 27 September. While profits were down significantly, revenue was up nearly 10%, boosted by online shopping deliveries. And in a positive development, the group raised its full-year revenue forecast. It now expects revenue to be £380m to £580m higher year-on-year.
Finally, late in the month, the shares received more upgrades from City analysts on the back of half-year results. In the space of just a few days, there were upgrades from Credit Suisse, JP Morgan, and Bank of America.
My view on RMG shares now
I’ve said before that Royal Mail is not a stock I’d want to own for the long term. There are a few reasons I don’t like the FTSE 250 firm.
First, I believe that the company is going to continue to experience structural challenges. It has admitted recently that its delivery structure “no longer meets customer needs.” Ultimately, it needs a massive overhaul.
Second, it doesn’t have a good track record when it comes to profitability. Over the last three years, return on capital employed has averaged just 3%. That’s poor. It shows that Royal Mail earns a very low return on every pound invested in the business.
Third, after advising that it will pay no dividends this year, it no longer has a dividend growth track record. I like companies that can demonstrate excellent long-term dividend growth, such as Unilever and Diageo.
With that said, I think the best approach towards Royal Mail shares is to be selling while the share price is high. If I owned the stock, that’s what I’d be doing. I’d then look at deploying the proceeds of the sale into higher-quality, lower-risk stocks that have more long-term growth potential.
