It’s been a painful year for shareholders in Royal Mail Group (LSE: RMG). After a strong start to 2022, the stock has plummeted – ranking it as one of the worst FTSE 100 performers since the turn of the year.
The Royal Mail share price is down over 36% year-to-date. And last week alone saw a near 8% fall. So, does this fall present an opportunity for me to add Royal Mail shares to my portfolio? Let’s explore.
Bull case
What makes me most bullish about Royal Mail amid the falling share price is the firm’s expansion through its international Global Logistics System (GLS) subsidiary. And I think this could be pivotal for it in the future. Reducing its reliance on one territory will provide Royal Mail with diversification when it comes to generating profits. And this can already be seen by the expected 9% (in euro terms) revenue growth for GLS. With its 1,500 depots globally, it’s clear to see the value GLS can provide.
Another tempting factor for me is Royal Mail’s low valuation. With a price-to-earnings ratio of around 3.8, this is comfortably below the accepted bargain threshold of 10. While it is also dwarfed by the FTSE 100 average of 15. The 5% dividend yield currently offered is also a further appealing factor when considering buying Royal Mail shares.
The business has also taken strides to cut costs through its plans to make 700 managers redundant. While this is obviously awful for the soon-to-be ex-employees, this move is expected to save it around £40m every year. However, there is a one-off cost of £70m associated with these redundancies, meaning the impacts of this move will not likely be seen until 2023.
Bear case
With this said, there are also some pressing issues with Royal Mail.
Firstly, rising inflation and the cost of living will harm it in numerous ways. For example, fuel costs for deliveries will rise. And on top of this, workers are demanding a pay rise as the cost of living continues to jump. Royal Mail has a track record of disputes with the Communication Workers Union. And should it be successful in its latest attempt at a pay increase, this may eat into the firm’s profits. This would obviously be bad news for the Royal Mail share price.
On top of this, Royal Mail has also seen its costs increase due to staff shortages. For example, in January around 12% of its workforce were off sick. Year-to-date, covering these shortages has cost the firm north of £300m. This is clearly not good news.
What I’m doing
So, while Royal Mail may face some short-term issues, I think in the long term the business has the potential to thrive. The restructuring moves it has taken will help cut costs, and its GLS subsidiary could be key in the future for the diversification of profits. Its low valuation is also an appealing factor. As such, I am incredibly tempted to buy Royal Mail today.
