The fairness of the Royal Mail (LSE: RMG) IPO is open to debate.
Some Fools may feel hard done by in so far as they received nothing, while others may appreciate the government’s effort to allocate shares to smaller investors, with each individual receiving the same amount.
Either way, the listing was a success and, in fact, may have been too much of a success (if that’s possible) because the share price of Royal Mail has increased rapidly since the IPO.
Indeed, shares are now priced at 541p — over £2 (or 64%) higher than their initial listing price of 330p. For me, this shows that the market is encouraged by the strategy employed by the company and is comfortable with the direction in which it is heading.
Therefore, with market sentiment being strong, I think that now could be a good time to buy shares in Royal Mail, while the ‘trend is your friend’ and the stock price keeps making higher highs.
Furthermore, with shares being around 7x oversubscribed, there may still be a queue of investors who are looking to buy. There may also be a lack of sellers, since the initial yield of 6.1% may be a reason for them to hold on to the shares. In other words, supply and demand could continue to work in investors’ favour.
In addition to bullish sentiment, I’m also impressed by the level of capital expenditure undertaken by Royal Mail over the last few years.
Indeed, a concern I had was that the company may have neglected to reinvest sufficient profits back into the business, with it having one eye on the IPO. In other words, I felt it could have reduced spending on property, plant and equipment so as to show how strong its free cash flow was and how well covered its dividend is.
However, with free cash flow averaging over £300 million per annum over the last three years, this is clearly not the case and I believe that Royal Mail is utilising its resources effectively to modernise and drive efficiencies through the business.
> Peter does not own shares in Royal Mail.