Royal Mail shares are falling: should I buy?

Having fallen 15% over the past two months, Royal Mail shares seem to on a bearish trajectory. Dylan Hood assesses if this is a buying opportunity.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Royal Mail (LSE: RMG) shares had a knockout 2020. Although the pandemic did cause a slight drop, the shares finished 45% higher at the end of the year. What’s more, the share price has risen a whopping 186% over the past year, making it one of the FTSE 100’s top performers.

Recently, this momentum seems to have slowed, with the share price dropping almost 20% in the past 90 days. However, does this present the perfect buying opportunity for me with Royal Mail shares? Let’s take a closer look.

Pandemic gold mine

The pandemic forced us to stay at home and online shopping went through the roof as a consequence. Therefore, it’s obvious to see why Royal Mail shares shot up at the tail end of 2020. Moving out of the pandemic, this will inevitably slow down, however, many online spending habits will likely stay. JP Morgan has highlighted this, reporting that e-commerce accounted for 16% of all US sales in 2020. In the UK it’s even larger, with the ONS reporting a 26.4% figure for July 2021. That’s almost 7% higher than the UK’s pre-pandemic levels. Royal Mail shares are in a good position to benefit from this in the long term.

In addition to this, a cost-cutting plan was put into place during the pandemic. Although this led to 2,000 job cuts, it has streamlined the company and helped drive higher profits. The £130m in savings will help the firm move towards a more automated future – something competitors are already doing.

It has been acknowledged that previous management was too slow in the move to automation. Royal Mail currently operates 20 automated parcel sorting machines, but this number is expected to rise with interim executive chairman Keith Williams saying that the firm “needs a quicker change of pace”. I think these changes are necessary if the firm wants to remain a frontrunner in its field.

Risks for Royal Mail shares

An obvious concern for Royal Mail shares is the post-pandemic slowdown in parcel volumes. In its 2021 Q1 reports, it highlighted that parcel volumes have already decreased 13% compared to Q1 2020. I expect this to continue throughout the back end of this year. Royal Mail’s thin profit margins place it in a vulnerable position if this is the case.

In addition to this, the pandemic is still looming. Due to the ‘hands-on’ nature of the business, staff could continue to be affected by self-isolation problems. This will increase costs and reduce profits for the firm.

Yet the firm seems to have positioned itself well for the future, even if the automated infrastructure is being implemented a little late. Personally, I like the look of Royal Mail shares as an addition to my portfolio for the long term. However, I would wait to see how the share price pans out in the coming months before I consider buying.

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.

Dylan Hood 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »