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The Royal Mail share price is rocketing! Should I buy this cheap FTSE 100 stock now?

GLS van in front of building
Image source: GLS

The Royal Mail (LSE: RMG) share price is in fine form this morning as the FTSE 100 company delivered its latest set of half-year numbers.

Having lost some of its mojo over the last few months, is the recovery now on? And have I finally changed my mind on whether to buy a slice of one of the oldest postal firms for my own portfolio?

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Profits soar!

Revenue climbed 7.1% to just over £6.07bn over the six months to the end of September. Broken down, the main UK-focused business contributed two-thirds of this number (£4.07bn) with most of the remainder coming from GLS — its international parcel operator.

Helped by lower costs, adjusted operating profit rocketed to £404m — up from just £37m over the same period last year.

CEO Simon Thompson reflected that the Covid-19 pandemic has “accelerated the trends” already seen by the company. Domestic parcel volumes were 33% higher compared to two years ago. Almost the same percentage rise was seen over at GLS. However, they were down 4% and 8% respectively on last year. That’s to be expected considering the boom in online shopping during multiple lockdowns.  

Looking ahead, the main Royal Mail business is targeting roughly £500m in adjusted operating profit for the full year. No change was made to the guidance for GLS where a “low single-digit” percentage rise in revenue is still expected.

Still cheap

Despite losing momentum recently, the Royal Mail share price has still performed for holders over 2021. In the year-to-date, RMG stock is up 35%. In the last 12 months, it’s jumped 61%. These are superb returns over such a short period for such a giant company.

As you might expect, they also compare very favourably to the FTSE 100 as a whole. It’s up 11% and 14% respectively, once again highlighting how much I could potentially gain from picking individual stocks over buying an index tracker.

Notwithstanding this solid rise, RMG stock still looks cheap, changing hands for just 7 times earnings. Despite questioning the quality of the business in the past, I can’t deny that this is an attractive valuation, especially when considering the added incentive of the dividends. 

Having announced an interim dividend of 6.7p per share this morning, the consensus view among analysts is that RMG will return 20.4p per share in FY22. Using the current Royal Mail share price, that becomes a yield of 4.4%. What’s more, this payout looks to be very secure — covered almost 3 times by profit. 

It gets even better for holders. Today, the company also announced a £200m share buyback and a separate special dividend worth another £200m. No wonder the Royal Mail share price is on fire.

Changing my mind

I’ve been disinclined to invest in RMG in the past due to its dwindling letters business and increased competition. These issues haven’t gone away. However, I must say that the company is beginning to win me over.

Sure, there are definitely better UK-based businesses to invest in. And, yes, Royal Mail isn’t immune to inflationary pressures that look like impacting many/most UK firms for some time to come.

Still, based on today’s numbers, the low valuation and the solid dividend stream, I’d now consider buying the stock as part of a diversified portfolio. It may also be a particularly good share to hold if UK Covid-19 infection levels start rising again.

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Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

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Paul Summers 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.

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