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Why I think Royal Mail is a top FTSE 100 dividend stock that could bounce back

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The Royal Mail (LSE: RMG) performance has been disappointing of late from both a business and investment perspective. The company’s shares have fallen by 44% since May, while a recent profit warning suggests that its strategy isn’t working as well as planned.

Despite this, long-term growth potential of the business could improve. Its international growth prospects remains high, while online shopping could boost its parcel operations. Alongside another lowly-rated share, which released an update on Friday, it could provide improving performance in future.

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Turnaround potential

The company in question is gold miner Petropavlovsk (LSE: POG). It reported total gold production of 102,000 oz in the third quarter, which compares to production of 104,000 oz in the same quarter of the previous year. Encouragingly, the company’s development and commissioning of the POX Hub has continued to progress, while it’s set to produce between 420,000 oz and 450,000 oz for the full year.

The company has experienced an uncertain period, with operational challenges and changes to management having disrupted its overall performance. Alongside this, the gold price has come under pressure in recent months as a result of increasing US interest rates and a generally positive outlook for the world economy.

As such, the Petropavlovsk share price has fallen by around 18% so far this year. This puts it on a forward price-to-earnings (P/E) ratio of around 6, which suggests that it may offer a margin of safety. While potentially risky, challenges facing the world economy could lead to increased demand for gold. As a result, it could offer improving performance in the long run, albeit with high levels of volatility.

Turnaround potential

One reason for the decline in the Royal Mail share price in recent months has been the continued difficulties it faces in its letters division. Its cost avoidance and efficiency strategies are not working as well as expected, and the challenges it faces from falling demand for letters looks set to continue.

This, though, may be offset by rising demand for parcel delivery. The popularity of online shopping is set to increase, and the company could therefore be in a strong position to capitalise on this. It’s also generating strong growth from its international segment, GLS. Further investment in GLS is set to be provided, and this could be used to make further acquisitions and enhance its position in what seems to be a number of growing markets across the world.

With the Royal Mail share price now having a P/E ratio of around 9, it seems to offer a wide margin of safety. Although further falls in its market value cannot be ruled out, in the long run it has the potential to generate improving financial performance. Given that unpopular shares can provide more appealing risk/reward ratios for the long term, the present time could prove to be a worthwhile buying opportunity for less risk-averse investors.

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Peter Stephens 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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