The Royal Mail share price is up 96% in the past year. Have I missed the boat?

The Royal Mail share price nearly doubled over the past 12 months. But as it has fallen 22% since June, one Fool considers whether to buy the dip for his portfolio.

| 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.

sdf

The Royal Mail (LSE: RMG) share price has nearly doubled since this time last year. In September 2020, it was at 240p. Then increased demand for its services saw the share price hit a high of 606p on 8 June, before slipping by 22% to 472p today.

So does this dip represent a buying opportunity, or could it fall even further?

Trading update

Last Thursday, Royal Mail posted a trading update that saw a mixed investor reaction. Yes, the share price has dipped a little further. But the overall tone of the update was broadly positive. Chairman Keith Williams said that between April and August the group “saw continued revenue growth across the Group, with both Royal Mail and GLS reporting higher revenues than the prior year.” 

The numbers back him up. Overall revenue grew by 8.2% year-on-year and by 17.7% compared to the same period in 2019. This is largely thanks to increased parcel sales; Royal Mail parcel revenue was up 34%, and volume up 18% compared to 2019. This is especially important for the company’s growth, as parcels now make up a majority of the group’s sales. And Williams is “confident that domestic parcels are re-basing at a significantly higher level than pre-COVID.”

I think this is great news for the Royal Mail share price. Over the past two years, repeated lockdowns saw all but essential stores close. Every consumer — including me — relied on parcel deliveries to get goods. And this increased business for Royal Mail was responsible for its soaring revenue.

A key concern was that post-pandemic, parcel deliveries would rapidly slow down. But it seems that higher demand for parcels might be here to stay. Accordingly, H1 2022 fiscal year profit is projected to be between £395m and £400m. And this is significantly higher than pre-pandemic levels.

Then why the dip now?

As noted above, the company’s revenue growth has relied on the increased demand for parcels. But when a company’s focus narrows down to one service, it leaves itself vulnerable in case there’s a slowdown. And this seems to be the case here.

The company is putting a positive spin on its trading update by focussing on the past five months as a whole. But parcel deliveries across the group actually dropped by 9% in July and August. While the company is blaming the decline on the summer weather, there’s the risk that parcel demand will continue to fall as the pandemic subsides. And the company accepts that there’s “significant short-term uncertainty.” 

There’s also plenty of competition from other parcel delivery couriers. And the company has suffered in the past from strike action. That’s a concern for any long-term investor.

My verdict for the Royal Mail share price

E-commerce has continued to grow since the Royal Mail IPO in 2013. And consumer habits may have changed permanently over the past two years. So I think further long-term growth is possible.

But it’s likely that the Royal Mail share price’s trajectory will be determined by its next update on 18 November. It will either show that parcel deliveries rose after the summer slowdown, or that they continued to fall. And the latter possibility could see the share price drop dramatically.

I think it’s a case of wait and see for me. 

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.

Charles Archer 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

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Value Shares

The BP share price is climbing – see how much £10k invested 1 month ago is worth now

It's been a tough few years for the BP share price. Harvey Jones examines whether the FTSE 100 oil giant…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

Nvidia stock has soared 1,471% in 5 years. Here’s how I’m hunting for the next Nvidia!

Nvidia stock has put in a stunning performance over the past five years. This writer tries to apply some lessons…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

If someone decided to start buying shares with £10k a year ago, here’s what they could be sitting on now!

If someone had started buying shares a year ago with £10k, what might have happened? Our writer outlines some factors…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

The Rolls-Royce share price is close to an all-time record. Could it still be a bargain?

The Rolls-Royce share price has been punching out the lights of late. Our writer thinks things could get even better…

Read more »

4 Teslas in a parking lot at a charger station
Investing Articles

The Tesla share price slips further — how much would £10k invested at the start of the year be worth now?

The Tesla share price remains under pressure, with risks mounting from multiple directions. Here’s what a £10,000 investment would be…

Read more »

British pound data
Investing Articles

The Ocado share price is a sea of red! Time to cut my losses?

Every time Harvey Jones checks out the Ocado share price, he sees red. Will it ever stop falling and leaving…

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

Over the next 5 years, I think these S&P 500 stocks will make me more money than a global index fund can

Edward Sheldon believes that these two high-quality S&P 500 growth stocks have the potential to beat the market over the…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Over the last 2 years, this investment trust has doubled the FTSE 100 index’s return

Here are three key reasons why our writer reckons this high-quality investment trust from the FTSE 100 index is worth…

Read more »