Would Warren Buffett buy Royal Mail shares now?

Royal Mail shares sport a high dividend yield right now but do they satisfy Warren Buffett’s criteria for stock purchases?

| 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.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

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

Much has been written about US billionaire Warren Buffett. And there’s a good reason for that — he’s one of the richest people on the planet. And he got to that elevated position by investing well for decades. But would he buy Royal Mail (LSE: RMG) shares now?

It’s possible — with a little research — to have a good idea of the type of stock opportunities he searches for. And one of the best resources is his collection of annual letters to the shareholders of Berkshire Hathaway. That’s the company through which he executes most of his investments.

Buffett picks businesses, not stocks

I’d first note his recent comment that he doesn’t pick stocks, he picks businesses. And when he chooses one, he treats his shareholding as if he owns the company outright. In other words, he tends to hold on for the long term as value builds within the business when it grows. And he’s unlikely to sell just because the stock market is volatile.

But to adopt a business-oriented mindset like that, Buffett tends to place emphasis on the quality of the enterprise. He’s looking for the best of the bunch. So quality indicators are important, such as returns against equity and profit margins. And he often speaks of businesses needing a competitive advantage to generate high returns. And to do that, they need what he describes as an economic moat to keep the competition at bay.

Sometimes moats come in the form of strong brands that customers love and keep returning for more. Sometimes it’s network effects or high customer switching costs. But there are others as well. And the important thing is to identify one. Those high financial return figures can help to alert us that an economic moat could be present in the operation.

Quality is not enough, though. I read a book called The Warren Buffett Stock Portfolio by Mary Buffett and David Clark, and they pointed out that Buffett often insists on a clear path to growth. He expects to hold an investment for years and he wants the business to expand its profits while he’s holding.

Valuation

Finally, Buffett is well known as an investor with a keen eye on price. Not only does he want quality and growth prospects, but he also insists on what he describes as a “fair” valuation when he buys the stock. So, he’s often out shopping for businesses when stock prices have fallen lower, perhaps because of worrying general economic news. 

So how does Royal Mail (LSE:RMG) measure up against Buffett’s business-selection criteria? Not very well. The net profit margin runs somewhere below a modest 5% and the return against equity is about 12%. The return against invested capital is around just 8%. And I can’t identify a strong competitive advantage in the firm’s parcel business. Indeed, the company operates in a sector with lots of other companies offering similar services.

With the share price near 271p, the forward-looking price-to-earnings ratio is just below six for the trading year to March 2023. But Royal Mail has a fair amount of debt and a patchy earnings record. However, one positive point is the dividend yield. It’s predicted to be about 8% in the current trading year and that’s chunky. Nevertheless, my guess is that Royal Mail would be unlikely to attract Buffett.


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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

In 12 months, a £10,000 investment in easyJet shares could become…

easyJet shares have plunged in value following a profit warning on Thursday (17 July). Can the FTSE 100 travel share…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

This S&P 500 blue chip looks far too cheap to me at $183!

Our writer picks out one high-quality S&P 500 stock that is currently the cheapest among the 'Magnificent 7' group of…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Down 23% today! This one’s stinking out my Stocks and Shares ISA

Our writer's wondering what to do with a problem named Ashtead Technology (LON:AT.) in his Stocks and Shares ISA portfolio.

Read more »

Two male friends are out in Tynemouth, North East UK. They are walking on a sidewalk and pushing their baby sons in strollers. They are wearing warm clothing.
Investing Articles

Down over 20%, should I dump this FTSE 100 dividend stock?

Our writer has been loving the passive income this dividend stock has been throwing off. But does the big share…

Read more »

Businesswoman calculating finances in an office
Investing Articles

I’ve just bought this FTSE share…

Our writer explains the thought process that led to him buying this FTSE share. One that’s likely to do well…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Just over £5 now, easyJet’s share price looks cheap to me anywhere under £13.84

easyJet’s share price has dropped recently, which could mean the business is worth less than before. Conversely, it could mean…

Read more »

Trader on video call from his home office
Investing Articles

36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock?  

This FTSE 250 firm is a leader in a growing sector and has secured several new sites to drive its…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

3 UK shares that have recently become takeover targets

Mark Hartley examines why these three UK shares have become takeover targets and could be bought out by rivals in…

Read more »