Why is the Royal Mail share price falling?

Shares in Royal Mail have underperformed over the last 12 months. Here, Edward Sheldon looks at what’s going on.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Stack of one pound coins falling over

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Royal Mail (LSE: RMG) shares have had a poor run recently. A year ago, the RMG share price was hovering around the 500p mark. Today however, it’s at 325p.

So why is the Royal Mail share price falling? And has this big decline provided a buying opportunity for me?

Why Royal Mail shares have tanked

In my view, the big share price fall here is down to a combination of factors. The first is weaker parcel volumes.

During the pandemic, Royal Mail saw parcel volumes explode on the back of the boom in online shopping and high demand for Covid-19 test kits. However, recently, e-commerce sales have dipped as physical stores have reopened and people have stopped ordering test kits, impacting the company. In the last quarter of calendar 2021, for example, domestic parcel revenue was down 5% year-on-year.

The second is inflation. In its last update, the company said it was seeing upward pressure on costs. This is likely to hit profits in the near term.

Analysts at Citigroup forecast 5% wage inflation and 6% inflation in non-personnel costs to hit results for this financial year (ending 28 March 2023). As a result of spiralling costs, analysts are reducing their earnings forecasts for this year. Over the last three months, the consensus forecast for FY2023 earnings per share (EPS) has fallen by about 14%.

A third factor is weaker economic conditions. This could hit consumer demand in the near term. This, in turn, could translate to lower parcel volumes.

Finally, broker sentiment towards RMG shares has really deteriorated this year. In March, for example, Deutsche Bank downgraded the stock to ‘sell’ from ‘buy’, while Credit Suisse cut it to ‘underperform’ from ‘neutral’. More recently, analysts at Barclays cut their price target by a whopping 38% to 400p. This kind of broker activity will have put a lot of pressure on the share price.

Should I buy Royal Mail shares now?

So is the stock worth buying after the recent pullback? Well, it certainly looks cheap. With analysts expecting EPS of 53.6p for this financial year, the forward-looking P/E ratio is just six.

That valuation does seem low. If business conditions improve, the stock could potentially see a rerating, where the share price rises as investors are willing to pay a higher valuation for it.

Meanwhile, there could be some big dividends on the table here. For FY2023, analysts expect the group to pay out 7p per share in dividends. At the current share price, that equates to a yield of around 7%.

However, one thing that turns me off this stock is its patchy track record. In the past, its profits have fluctuated a lot. And so have its dividend payments. In recent years, it has cut its payout.

Another thing I don’t like here is the low level of profitability. In the past, Royal Mail has not generated a high return on its capital. Companies that generate low returns often turn out to be poor investments as they don’t grow much over the long run.

Weighing everything up, I think there are better stocks to buy today.

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.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

More on Investing Articles

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

£10,000 invested in Palantir stock 5 years ago is now worth…

Palantir stock's exceeded the expectations of probably the most bullish analysts. But Dr James Fox isn’t convinced by the current…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Here’s why I’ve changed my mind on this plummeting FTSE 100 share!

I was confident that this FTSE 100 share would bounce back after its recent troubles. Now I'm not so sure,…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

The more Apple stock falls, the more tempting it looks!

After a 16% drop this year, Christopher Ruane has been eyeing adding some Apple stock to his portfolio. But has…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Is the Lloyds share price taking a breather before its next move up?

After an outstanding few years of performance, the Lloyds share price seems to have run out of steam in recent…

Read more »

Investing Articles

Down 18%, this FTSE 100 dividend stock just hit a 16-year low!

This blue-chip dividend stock is trading at its lowest level since 2009. Should I add it to my Stocks and…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

A profit warning sends the WPP share price 16% lower!

The WPP share price fell heavily today as investors digested the company’s latest trading update and profit warning.

Read more »

ISA Individual Savings Account
Investing Articles

3 things I look for when buying stocks for my Stocks and Shares ISA

Edward Sheldon is aiming to fill his Stocks and Shares ISA with picks that are capable of providing him with…

Read more »

Business woman creating images with artificial intelligence inside office
Investing Articles

‘Britain’s Warren Buffett’ is betting on these AI stocks… but for how long?

Meta and Microsoft make up 17% of the Fundsmith Global Equity portfolio. But could higher capital intensity cause the 'UK’s…

Read more »