Royal Mail (LSE:RMG) benefitted from the pandemic as the demand for letters and parcel services increased. This in turn pushed the Royal Mail share price on an upward trajectory. The shares have dipped in recent months, however. Is this an opportunity to add the shares to my holdings?
Royal Mail share price activity
The pandemic led to higher than expected e-commerce spending, which meant the need for packages and letter sending services was high. Royal Mail benefitted, as did its share price.
When the pandemic hit in 2020, Royal Mail shares crashed to as low as 133p on 21 March 2020. Since that point, the shares steadily increased, reaching a high of 590p in May 2021, which is a mammoth increase of 343%! Since that point, however, the shares have pulled back by close to 40% as the shares are trading for 356p, as I write.
Could falling demand as well increasing costs have brought the Royal Mail share price back to a more realistic price or is this a temporary blip?
Recent events
Royal Mail’s most recent set of results, a Q3 update released at the end of January, presented a mixed view of progress and issues, in my opinion. On a positive note, performance guidance remained unchanged with a forecast of £500m of operating profit remaining intact for FY 21/22. Furthermore, its European parcel business, GLS, continued to perform well, with both revenue and profit margins expected to be close to 10%.
The bad news from Royal Mail’s update was the fact that demand looks to be falling, compared to pandemic levels. I believe this could have been predicted as the economy looks to bounce back and restrictions are removed. The update mentioned parcel volumes declined 7% year on year and parcel revenues are down by nearly 5% too.
One of the biggest factors for the Royal Mail share price dropping off in recent months is that of soaring costs and inflation. This is a big worry for businesses in many sectors. Royal Mail also said in its update that in January, it had 12% of its workforce off sick in that month alone. This led to a spike in overtime and additional staffing costs. I believe this will put a strain on profit margins for year end results.
Finally, rising inflation is going to affect Royal Mail shares too. Higher inflation could mean higher wages. Royal Mail has often tussled with the Communication Workers Union in the past and the union’s position of strength may mean Royal Mail could pay higher wages in the future.
My verdict
Despite Royal Mail shares falling recently, there are a couple of positives, in my opinion. Firstly the shares do look cheap. The shares currently sport a price-to-earnings ratio of just over four, which is dirt cheap. It also pays a dividend and has pledged to increase this dividend in the next fiscal year too. Its dividend yield currently stands at just over 4% and could increase based on next year’s commitment.
The Royal Mail share price looks tempting to me with such a low valuation and an enticing dividend yield. I’m tempted to add the shares to my holdings at current levels and believe my strategy of buying and holding for the long term could prove to be a shrewd move for my portfolio.
