Although Royal Mail (LSE:RMG) shares have seen a disappointing few months in terms of performance, the long-term picture is still positive. Over a one-year period, the shares are up 102% at the current level of 490p. Earlier this year, the share price did top out above 600p. From there, it lost ground over the course of the summer. So how would my theoretical £1,000 investment look now, and what could the future hold?
Positive returns over the past year
Given that Royal Mail shares are up 102% over the past year, my £1,000 would be worth £2,020 today. This is undoubtedly a great return over this time frame. In fact, when I look at the FTSE 100, there are only three other companies within it that would have doubled my money over the past year.
However, I do need to take this return with a slight caveat. Over the past year, 80% of FTSE 100 companies have delivered a positive share price return. This is a very high figure. The reason that most stocks are in the black is that the period takes into account the aftermath of the stock market crash last year.
After the crash in March, we did see a bounce higher in April and May, before the index stalled over the summer. It was really only in the autumn that we saw stocks materially move higher. This move has continued in almost a linear fashion. Therefore, most stocks would have given me a profit if I’d bought a year ago.
This doesn’t take away from the big return of Royal Mail shares, but does highlight that some of the gains have been driven by improving investor sentiment generally.
Could Royal Mail shares have more gains?
In terms of company-specific factors, Royal Mail shares have benefited from strong customer demand for the firm’s services. This was particularly driven by growth in parcels last year, accounting for 59.3% of revenue for the group. Even though letters volume declined, increased parcels demand from the pandemic saw a net increase in revenue. Ultimately, this led to a 2020 reported profit of £620m, up significantly from the 2019 figure of £161m.
However, continued gains are in no way guaranteed. I wrote last month about how I would actually prefer to sit on the sidelines for the moment instead of investing in Royal Mail shares. My view is unchanged today.
Primarily, I see a risk of falling parcels volume now that pandemic pressures are easing. The ability for customers to shop in-store or not to be so homebound for deliveries should provide negative headwinds for the company. In fact, in the trading statement released in July, parcels volumes were down 13% for the quarter.
Unfortunately, I think that this trend could continue. With letters volumes unlikely to be able to increase enough to offset this fall, I struggle to see how Royal Mail shares can deliver anywhere near the performance seen over the last year.
I could be wrong, with a further update due to next week from the company. If a promising outlook is given, then the shares could rally. But currently, I’m not keen to buy.
