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Here’s why I would buy Royal Mail shares today

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A Royal Mail GLS delivery man
Image source: GLS

Royal Mail (LSE: RMG) shares rocketed almost 10% yesterday. What’s more, they’ve risen 14% over the past 30 days, and 67% in a year. Currently trading at 480p, I think this stock could be a great buy for my portfolio. Here’s why.

Festive season

Royal Mail boomed during the pandemic, with parcel volumes rising as lockdowns were enforced across the globe. As lockdowns have lifted, it seems that this trajectory has been maintained. In the five months to August 2021, parcel volumes increased 18%, with revenues rising 7.2% compared to the same period in 2019.

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With Christmas just around the corner, I would expect Royal Mail parcel volumes to begin to surge again. This is only going to continue the encouraging momentum, and I would expect this to be reflected by Royal Mail shares rising.

In addition to this, consumer shopping trends have changed in recent years with a much higher number of sales being made online, and hence their purchases need to be delivered. For example, in 2012 the value of online retail sales was just £33bn. In 2020, this number tripled to £99bn, highlighting the impressive growth in the sector.

Also, as my fellow Fool Rupert Hargreaves pointed out, Royal Mail shares are currently sitting at an 8.2 times forward price-to-earnings multiple. The company’s encouraging growth and the potential for a 2.4% dividend yield make RMG seem like a bargain to me.

Royal Mail has also taken steps to ensure it captures as much of this market share as possible. During the pandemic, the firm cut 2,000 jobs and in the process, saved around £130m. This extra cash is being used to automate many of the old manual processes. For example, the firm recently announced a new fully automated sorting machine at Royal Mail Tyneside. The machine can reportedly process up to 180,000 parcels a day. Previous management had been notoriously slow to adopt a move to automation, however, this seems to be changing for the better.

Royal Mail share price risks

While there seem to be many positives for Royal Mail and its shares, there are still challenges the firm needs to overcome. The Tyneside machine is great, yet there are still many other locations that need to follow a similar process if they want to keep up with younger, more streamlined parcel delivery services. Moving forward, this is likely to cost the firm millions.

In addition to this, Royal Mail (like many other companies) is struggling to hire enough part-time staff to cover the busy winter period. It could mean delays and breakdowns in customer service. What’s more, after the festive period ends, I expect we could see a slowdown in parcel volumes. 

All that being said, I do see opportunity with Royal Mail shares. Sustained growth and new machinery seem to have impressed investors in recent days. I expect the busy festive period to carry on this trajectory for the stock. Therefore I would add it to my portfolio today.

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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.

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