After rising above the £6 mark in mid-2021, the Royal Mail share price has been on a downward trajectory ever since. In fact, it’s just hit a 52-week low.
Should I regard this as an opportunity to load up on the shares? Here’s my take.
Failing to deliver
It’s not hard to fathom why the Royal Mail share price has lost height. Go back a couple of years and people were being forced behind their doors as a result of the pandemic. As a result, online shopping rose exponentially. All those parcels needed to be delivered and Royal Mail was one of the companies to do it. No wonder the stock multi-bagged in value.
Now that restrictions have been totally removed in the UK (and the cost of living has climbed), demand has moderated. The company now faces a number of headwinds, including rising costs and the need to pay higher wages to its workers. The same undoubtedly applies to the majority of businesses at the moment.
Even so, I’ve never liked the fact that this company frequently finds itself embroiled in disputes with unions. Increasing competition could also keep a lid on profits. In fact, I suspect the increase in margins and returns on capital seen in the last couple of years won’t last.
On top of this, the £3.2bn-cap is currently receiving quite a bit of attention from short-sellers (those betting that the Royal Mail share price has further to fall). Based on data compiled by shorttracker.co.uk, the company is the 10th most hated stock on the UK market. That’s not necessarily a killer blow to the investment case, but it does put paid to the idea that this is some kind of ‘no brainer’ opportunity, in my opinion.
On the bright side
If all this sounds like I’m completely against Royal Mail as an investment, let me put that idea to bed. There are definitely a few things to like here.
For one, the shares look exceptionally cheap, especially given its plans to expand its international delivery division — Global Logistics System (GLS). Based on analyst projections, RMG trades on less than six times forecast FY23 earnings. That feels overly pessimistic.
If it’s able to surprise on the upside even slightly, this could turn into a nice recovery play, especially if shorters are forced to quickly close their positions.
The passive income stream is another attraction. Based on a potential 23.4p per share cash payout, Royal Mail stock yields a juicy 7%. This makes it one of the highest yielding stocks in the UK market (ignoring anything linked to Russia).
It’s also roughly double what I’d receive from a FTSE 100 index tracker. That’s got to be worth something in this inflationary environment. The dividend also looks pretty safe too, covered 2.4 times by predicted profit.
Does all this help compensate for the frankly awful form of the Royal Mail share price? Yes, but perhaps only to a point.
On the fence
Based on the above, I remain split as far as RMG is concerned. As a cheap source of passive income, it’s definitely up there. Nonetheless, the fairly foggy outlook combined with its long-term track record tells me I’m probably best off looking elsewhere with quality and growth being priorities.
