Are Royal Mail shares a buy today?

Royal Mail shares have experienced a drastic fall this year. In this article, Charlie Keough decides whether this is an opportunity for him to buy.

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Royal Mail (LSE: RMG) shares have had a terrible 2022. Down over 45% year-to-date, this poor performance has seen the stock demoted from the FTSE 100. Five years ago, the courier business was trading for over 400p. However, today the stock is sitting just above the 280p mark.

So, does this fall present an opportunity for me to snap up some cheap Royal Mail shares today? Let’s take a look.

Why is Royal Mail down?

Royal Mail’s downfall can be largely pinned to the poor results the firm has posted in recent times. The company experienced a boom in business during the pandemic as Covid-driven online shopping fuelled demand. However, with the easing of restrictions, the business has suffered. A reduction in activity, as a result, has seen Royal Mail miss multiple analysts’ targets. Investors have reacted negatively to this, in turn pushing down the stock’s price.

The current macroeconomic environment has also impacted the firm. With inflation on the rise and a potential recession around the corner, demand will most likely slow in the months ahead. Should this occur, there would be an increased likelihood of a fall in the share price.

Wider factors

Despite this, I do see value in the current share price.

The major attraction to me is the stock’s meaty dividend yield. Royal Mail currently offers a yield of nearly 6%. And with inflation continuing to rise, this would offer me a passive income stream, helping to partially hedge against rising rates. What I further like about the stock is its low valuation. With a current price-to-earnings ratio of 4.55, these are two tempting factors when considering adding Royal Mail to my portfolio.

However, the business is currently embroiled in a dispute with the Communication Workers Union (CWU) regarding pay rises. With the cost-of-living crisis, the CWU has demanded that Royal Mail pays its workers more than their current rates. With all offers to date having been rejected, more than 115,000 workers will vote in the weeks ahead on whether to take industrial action. Should this occur, I’d expect this to reflect negatively on the Royal Mail share price.

The business also finds itself with a large amount of debt. This currently sits at £985m, according to its full-year results for the 2022 fiscal year. To add to this, its cash balance also fell by 50%. Combined, these factors could mean Royal Mail facing trouble in the future.

Is Royal Mail a buy for me?

The shares do look cheap. And the near-6% dividend yield is a tempting factor for me when considering whether to buy the stock today. However, I think the firm will struggle to overcome its challenges in the months ahead. Its large debt is a concern. And another issue comes in the form of its dispute with the CWU. Should Royal Mail be able to successfully navigate this, I would potentially consider investing. But for the time being, I won’t be buying the shares 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 considered so you should consider taking independent financial advice.

Charlie Keough 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.

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