It’s been a tough start to the year for Royal Mail (LSE: RMG) shareholders. Falling from 519p to around 350p today, the Royal Mail share price is underperforming the FTSE 100 index by 31% so far in 2022.
Let’s examine why Royal Mail stock has struggled and if a recovery could be on the cards.
Why has the Royal Mail share price declined?
Royal Mail’s been plagued with Covid-related staff shortages in recent months, leading to delivery delays. The company received over 1m customer complaints in 2021 — the highest level for a decade. I believe Royal Mail’s decision to axe 700 management jobs at the start of the year as part of cost-cutting measures was potentially misguided in this context.
Ofcom, which regulates Royal Mail, is closely monitoring the situation and could fine the company over £1m for failing to meet delivery targets. Moreover, the price of a first class stamp recently rose from 85p to 95p. I expect demands for better service from cost-conscious customers will only intensify.
Royal Mail also faces stiff competition from US corporations, such as Amazon and UPS, dampening its potential future revenue growth. Current revenue figures aren’t too hot either. In Royal Mail’s latest quarterly results, domestic parcel revenue and volumes declined by 4.9% and 7% respectively year-on-year — a big contributory factor behind this year’s decline in the Royal Mail share price, in my view.
It’s also notable the company benefitted from the UK government’s Covid-19 testing effort, with test kits contributing to Royal Mail’s parcel volume. Free testing in England ended this month for most people. It’s likely this revenue stream will effectively dry up in 2022.
Positives for Royal Mail shares
Royal Mail may be of interest to value investors. Its price-to-earnings ratio is just above four, making it one of the cheaper FTSE 100 stocks. Passive income investors also have reason to cheer. Royal Mail boasts a 4.76% dividend yield — higher than that of the FTSE 100 as a whole at 3.56%.
Silver linings for the Royal Mail share price can be found in the quarterly performance of its foreign subsidiary, GLS, which delivers parcels in Europe, Canada, and the US. GLS enjoyed year-on-year revenue and volume growth of 4.5% and 5% respectively.
Furthermore, the company’s longer-term strategy could reap rewards. A focus on data-driven decision making and automated parcel sortation could lift Royal Mail shares if it translates into better customer service.
Finally, recent rumours that Royal Mail’s largest investor, Czech billionaire Daniel Kretinsky, may launch a takeover bid for the company constitute potentially positive news. However, the impact of any M&A deal is hard to predict without specific details. For instance, if his interest was limited to spinning off GLS from Royal Mail, this could do more harm than good to the Royal Mail share price.
Should I buy the dip?
Although Royal Mail shares look cheap, I’m reluctant to buy at present. The company’s problems with poor customer satisfaction are unlikely to disappear any time soon. I’m also wary of the potential impact an Ofcom fine could have on the Royal Mail share price. I believe there are better long-term opportunities in the stock market for me to put my spare cash to work.
