Why the Royal Mail (RMG) share price rose 49% in 2021

Jon Smith explains why the Royal Mail share price was one of the most impressive in the FTSE 100 last year on the back of a strong financial performance.

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On 30 December 2020, the Royal Mail (LSE:RMG) share price closed at 340p. Using the closing price from 2021 of 506p, this means that the shares rallied an impressive 48.7% last year. This gain ranked it among the top 10 performers in the entire FTSE 100 index for the year. Digging deeper, it’s clear that there were a few key reasons for the move higher in the shares.

A positive spillover from 2020

The first reason for the gain in the Royal Mail share price came from positive results for the year ending March 2021. This encompassed the impact of the pandemic with various lockdowns in this timeframe. Royal Mail was one of the few companies that actually performed well during 2020. 

Its success was driven by much higher demand for parcels. The fact that almost all of us were at home meant we needed to order more online. Added to this was the part that the company played in helping to deliver PPE kit and test kits. Even though traditional letters demand fell during this period, the spike in parcel volumes saw profits rocket higher. 

In the full-year report, adjusted operating profit came in at £702m, up from £325m the year before. Although the Royal Mail share price was already moving higher in H2 2020 as investors understood what was going on, the annual report wasn’t released until May 2021. Therefore, some of the boost to the shares was cemented when the full information came out.

Optimistic outlook helped the price

The share price did move lower during the middle of 2021. Investors were concerned that the spike in parcels growth was just a temporary blip. In the summer, a trading update showed that for calendar Q2, parcel volumes were down 13% versus the same period in the previous year. 

However, the gains built up over H1 weren’t completely lost by any means. The company said that it was “starting to see evidence that the domestic parcel market is re-basing to a higher level than pre-pandemic, as consumers continue to shop online“.

This was backed up in late 2021 by the H1 results. Royal Mail domestic parcel volumes were up 33% versus the same period two years ago. This fact highlights that the company is able to sustainably grow long-term volumes and demand, even if at a lower level than the bumper 2020 figures. This positive outlook is another reason why the Royal Mail share price rallied towards the end of the year.

A note of caution

Although the Royal Mail share price did well last year, it wasn’t all plain sailing. The company continued to feel the pressure from competition, something that will remain an issue for 2022. It also operated on very thin operating profit margins in the 3%-6% region. This is a risk for investors going forward. It means that if costs increase and revenue stays the same, then an operating profit can quickly flip to a loss.

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.

Jon Smith and The Motley Fool UK have 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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