The Royal Mail (LSE: RMG) share price has been one of the worst-performing stocks in the FTSE 250 this year. Year-to-date shares in the delivery company have fallen 23%, excluding dividends, extending losses over the past 12 months to a staggering 44%, excluding distributions to investors.
There’s a range of reasons why investors have been bailing out of the stock in 2019. The primary one is (lack of) growth. Earnings per share are on track to decline a shocking 50% this year, following a decline of 45% in 2019.
With earnings collapsing, management has been forced to cut the company’s dividend yield. The payout was slashed by 40% back in May. Unfortunately, it looks as if these pressures are going to continue because Royal Mail now has to deal with the possibility of a strike at its busiest time of year.
The last time I covered Royal Mail, I concluded that while the stock looked cheap, it deserved a low valuation, due to its falling earnings and low level of productivity. I finished my article by saying: “Until management can improve the company’s outlook, I think the stock is going to remain depressed.“
That was only a few weeks ago. Since then, the group’s outlook has only deteriorated.
Royal Mail’s relationship with its workers has always been rocky, but it looks as if relations have now hit a new low. In October, members of the Communication Workers Union (CWU), which represents around two-thirds of the firm’s 140,000-strong workforce, voted overwhelmingly for industrial action.
The CWU is frustrated Royal Mail hasn’t kept the promises it made in an agreement signed last year, which was designed to help reduce costs. It argues Royal Mail hasn’t respected the “spirit and intent” of the agreement. For its part, Royal Mail says it has followed the deal “to the letter.” The CWU is also unhappy with alleged bullying by management.
After weeks of attempted mediation, now looks as if the CWU is going to go on strike at some point before Christmas. This could be a devastating blow for Royal Mail.
If the CWU does decide to strike, it will hand Royal Mail’s competitors in the parcel market a considerable advantage at the most crucial time of the year. Put simply, the strike could have a substantial, multi-year impact on the company. If its customers go elsewhere, it’s most likely they won’t come back.
With its high cost base and declining letter volumes, Royal Mail needs as many parcel customers as it can get right now. An exodus would only put further pressure on earnings, and it could take the group years to recover.
On that basis, unless the company agrees on a last-minute deal to avoid any industrial action, I think there could be further declines ahead for the Royal Mail share price. It might be better for investors to cut their losses now and move on rather than wait around.
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Rupert Hargreaves owns no share 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.