The Royal Mail share price: is now the time to buy?

Royal Mail plc (LON: RMG) boss Rico Back faces a tough challenge. Roland Head gives his verdict on this week’s results.

| 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.

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.

The Royal Mail (LSE: RMG) share price has fallen by 60% over the last year. Are the shares now too cheap to ignore, or is this a business with deep-rooted problems?

I’ve been taking a closer look at last week’s results. In this article I’ll give my verdict on this 500-year-old business.

Not a great year

The firm’s performance during the 2018/19 financial year wasn’t that great. Although adjusted revenue rose by 2% to £10,581m, operating profit fell by 34% to £376m. The firm’s adjusted operating margin dropped from 5.7% to 3.6%.

Profits are clearly moving in the wrong direction. So what is chief executive Rico Back planning to do?

Two big changes

One change that shareholders will notice is that the dividend will be cut to 15p from this year. This is a change I support — the previous 25p payout was not affordable, in my view.

A cut was needed to free up cash for investment in the next stage of the company’s evolution. This will involve £1.8bn of new investment aimed at improving and expanding the firm’s parcel service.

This is important, because the firm expects the number of letters it handles to fall by about 26% over the next five years. Without significant growth in parcels, Royal Mail’s UK-wide network will be struggling to cover its costs.

By contrast, the parcels market is growing as more of us shop online. Mr Back is hoping to increase parcel volumes by 4% to 5% next year. The firm says this would represent an increase in market share, which I see as a vital element for a successful turnaround.

Gig economy vs unions

One of the firm’s key assumptions for the next five years is that the unions which represent its workforce will help to “deliver the change in a collaborative manner”.

Royal Mail’s industrial relations haven’t always been easy. Although this isn’t the place for a political discussion, I think it’s fair to say that many competing courier firms have an in-built cost advantage over Royal Mail, thanks to their use of non-union and self-employed workers.

Another of Royal Mail’s big costs is its physical network of post boxes and local sorting offices. I see this as an asset too — no other company has this kind of physical presence. But there’s no doubt that making a profit from this network requires high volumes and some restructuring to reflect the shift from letters to parcels.

Buy, sell or hold?

Chief executive Mr Back is targeting a five-year turnaround. This should restore Royal Mail’s profit margins to 5% and reshape its network to support parcel-led growth.

Further cost savings will be needed. Hitting these targets while keeping the company’s powerful unions on side won’t be easy. But in my view, this plan has two big advantages — it’s the only sensible choice and it should be supported by long-term growth in parcel volumes.

Is this the right time to buy the shares? The company’s £2bn market cap means the shares trade at a 45% discount to the group’s net tangible asset value of £3.6bn. This includes a £2bn property portfolio.

Profit forecasts suggest the shares could be cheap too. Royal Mail now trades on about eight times forecast earnings, with a 7% dividend yield after this year’s cut.

There’s a long road ahead, but I feel these shares could reward patient investors.

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.

Roland Head 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

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »