Royal Mail (LSE:RMG) has benefited from the pandemic as more people sent packages and letters. Based on the current Royal Mail share price and recent events, should I buy shares for my portfolio?
Royal Mail share price on the up
As I write, shares in Royal Mail are trading for 485p per share. This time last year, shares were trading for 241p, which means shares have increased in value by over 100% in 12 months. In 2021, the Royal Mail share price is up by 42% overall at current levels. Despite an overall impressive 12 months, the past three months have seen the share price slide. In June, shares reached 606p, which means shares have dropped nearly 20% in three months.
I believe investors are of the opinion that Royal Mail could not possibly repeat such strong performance levels as last year. Management’s pledge to spend big on increasing efficiency has not gone down well either. Both have had a short-term effect on the share price.
I have considered a case for and against investing in Royal Mail shares for my portfolio.
For investing
- Impressive performance. In full-year results announced in June, Royal Mail reported a 16.6% increase in revenue, and operating profit rose by 116%. Cash flow also rose and a dividend of 10p per share was proposed. In a recent trading update for the three months ending June 2021, revenue increased compared to the same period last year. As well as revenue, it reported that parcel levels were beginning to surpass pre-pandemic levels. I understand that past performance is not a guarantee of the future but it is promising nonetheless.
- Investment in operations. The Royal Mail share price has been affected by management’s decision to invest money into streamlining operations and increasing efficiency. I believe this will be a good thing longer term but may mean some volatility in the short term.
- Dividend. Royal Mail paid a 10p per share dividend in its most recent full-year results. A new policy announced in the same results means the dividend will increase from 10p to 20p per share next year. The dividend yield will hit close to 4% next year which is higher than the FTSE 100 average of 3%.
Against investing
- Competition. Royal Mail faces intense competition. These competitors already possess streamlined operations and are making headway in the marketplace, eating away at market share. This would affect the Royal Mail share price and bottom line.
- Cost of streamlining. Despite this initiative to streamline operations being a positive longer term, there is always the risk that these initiatives can overrun in terms of cost and timing. This would negatively affect Royal Mail and its bottom line.
- Strike action. Royal Mail has often had disagreements with its workforce. Strike action has often been mooted and taken place. This is never good for financials as well as investor sentiment and I must note it as a significant risk.
My verdict on the Royal Mail share price
Overall I believe that, in the much longer term, Royal Mail could be a good investment for my portfolio. The issue I have right now is some of its appeal hinges on forecasts and factors out of its control. This includes whether post-pandemic performance will be as impressive as the pandemic period. Furthermore, will capital spending be within scope to increase efficiency?
Would I buy shares for my portfolio right now? No. I will keep an eye on developments, however.
