I’ve been pleasantly surprised by the strong move higher in Royal Mail (LSE:RMG) shares over the past year. Having owned (and sold) shares in the business several years ago, I never expected the company to get the share price anywhere near the IPO level. Yet with it currently trading above 500p (up 280% in a year), it could exceed the levels seen back in 2013 shortly. In fact, I think this is a very real possibility.
The story over the past year
There have been several drivers contributing to the rally seen in Royal Mail shares over the past year. The main one, in my opinion, has been the growth in parcel deliveries. This has been bumped up due to the lockdowns. Simply put, with so many shops closed, online delivery has been the only option. Royal Mail has been the natural beneficiary here.
In the trading update to the end of Q3 2020, parcel volumes were up 31% from the nine-month period in the prior year. I can also add to the mix the delivery of PPE, vaccination letters and Covid-19 test kits. The business estimates over 1bn items of PPE have been delivered!
For Royal Mail shares, this increase naturally led to the price rising as higher volumes correspond to higher profits. To this end, the trading update commented that “we now expect group adjusted operating profit to be well in excess of £500m for FY2020-21.”
Another reason for the rally in Royal Mail shares has been the growth in GLS, a subsidiary of the business. It operates internationally, and is based in Holland. The company has reported that it expects annual revenue growth of 12% year-on-year until 2024-25.
My outlook for Royal Mail shares
Personally, I think the growth can continue. The company recently announced a one-off dividend of 10p per share due to the strong performance. If the outlook was worrying, management would have likely kept this money for cash flow needs. So I think this bodes well for continued growth into 2021 and beyond.
I also think Royal Mail shares can push higher thanks to the restructuring that should start to yield efficiencies. The 2,000 job cuts last summer, along with other cost-cutting measures, hurt in the short term. But through 2021, the lower cost base should help further increase profitability.
What are the potential risks? The one I see is whether the parcel business will be able to grow (or avoid contracting) when shops reopen. Will Royal Mail see volumes fall as people physically go out to buy things? I expect so, although I don’t think this risk is huge. After all, I think many people (myself included) order online for the convenience and availability. So even without lockdown, I think this area can continue to grow.
Overall, I’d buy Royal Mail shares now to aim to benefit from a strong 2021 for the overall group.
