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Why the Royal Mail share price rose 3% in September

A 3% share price rise in September might not sound exciting. But when we’re talking about Royal Mail Group (LSE: RMG), whose shares have lost 45% of their value since November 2018, any positive movement makes for a good month.

Unfortunately, the modest gain has really just been in line with the FTSE 250 (though the RMG share price has had a more volatile month), and since the end of September we’ve seen Royal Mail shares falling back again. At 194p at the time of writing, they’re now down 5.8% since the end of August.

Strike?

Confirmation towards the end of September that the Communication Workers Union is to ballot its members on the possibility of industrial action over job security and terms and conditions of employment didn’t help – and as I write, we’re awaiting the outcome of the ballot. The possibility of strike action, even if it doesn’t come from the current ballot, really doesn’t make the company look good in such an increasingly competitive business.

Looking at headline valuation metrics alone suggests Royal Mail shares might be a screaming buy right now. It’s not often that we see a stock with a forward price-to-earnings multiple of under 9 and with a forecast dividend yield of 7.4%. But bear in mind that Royal Mail boss Rick Back, as part of his cost cutting measures, has slashed the dividend and the 15p on the cards for 2019 is 40% less than last year’s.

Even then, the reduced dividend would still only be covered 1.5 times by forecast earnings, and I’d say that’s far from ideal for a company facing cash flow problems. Apparently there’s an understanding that there could be extra dividend payments if there’s cash to spare, but I believe that’s little more than a pipe dream.

Turnaround

As part of its turnaround strategy, Royal Mail is set to invest around £1.8bn in its UK business over the next five years, but I can’t help feeling that’s too little, too late. The firm’s competitors have already been making massive investments in their own businesses, and it’s showing in terms of customer service and pricing.

While the presence of post offices does give the Royal Mail a convenience advantage in terms of domestic post, an increasing portion of commercial packages I receive are coming from competing carriers. In fact, I’m expecting a parcel today and I’ve been given a one-hour slot for delivery – and a growing number of firms show me a real-time map of my delivery driver’s route. By contrast, parcels sent via Royal Mail rarely manage better than “Stay at home from dawn to dusk as it could arrive any time.”

Falling behind

Given Royal Mail’s dominant starting position when the postal business was opened up to competition, I see it as a bad sign today that the firm has found itself in a catch-up position. If there’s any recovery on the cards (and I’m not sure what the actual plan is other than to try to improve efficiency), I can’t see it coming to fruition for a good few years yet.

Royal Mail Group is a poor performer in a heavily competitive sector, and that’s enough to keep me away. I think today’s low share price is deserved.

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Alan Oscroft 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.