The Motley Fool

As the Royal Mail share price crashes 15%, is it time to buy for a rebound?

The Royal Mail (LSE: RMG) share price slumped by as much as 17% in morning trading as threats of industrial action are expected to impact the company’s outlook.

The six months to 29 September brought in a pre-tax profit of £173m (though that includes an operating profit of only £61m), and full-year operating profit guidance has been pegged at £300m-£340m. But the combination of strike threats and other problems could “possibly result in a break-even or loss-making position for the UK business in 2020-21,” according to chief executive Rico Back.

Strike

A pre-Christmas strike is off now, but that issue has not gone away. And what about other problems? The key one seems to be that, in the words of the CEO, “our transformation is behind schedule.”

He went on to say that “people are posting fewer letters and receiving more parcels. We have to adapt to that change.” That strikes me as a sort of ‘well, duh!’ thing. It’s something we’ve known about for a decade and more, and to me it doesn’t suggest anything positive about Royal Mail’s management if it’s still being talked about today as if it’s news.

The statement put some numbers on the decline, after describing the outlook for letters as challenging. The first half of the year was apparently Royal Mail’s best in five years for UK letter revenue, and the second half will be boosted by the general election. But despite that, overall addressed letter volumes (excluding election mail) are now expected to fall 7%-9% in the current year, and around 6%-8% in 2020-21.

Transformation

The boss reiterated the company’s plans to invest further in its future, saying: “We remain committed to investing £1.8 billion in our transformation.” That’s a lot of money, especially for a company anticipating full-year operating profit of £300m-£340m.

If the books were awash with cash, I wouldn’t be too concerned, but net debt has ballooned from £470m at September 2018 to £1,372m at the same stage this year.

The dividend policy was modified after it became clear that the 25p per share paid last year wasn’t sustainable against the cash the company needs to spend to turn around its business, and it was rebased to an expected 15p this year.

But the new policy was only announced in May, and I find it hard to believe it took that long for Royal Mail to notice that it was struggling and couldn’t afford to be so generous. I mean, did someone only just knock on the boardroom door and ask “Hey, have you seen this email lark? Do you think it means anything?”

Affordability?

Can Royal Mail afford even its reduced dividend payments? On the share price as I write, after the morning’s slump, that 15p per share would still yield a massive 7.7%. And, as far as I’m concerned, Royal Mail is simply not in a good enough cash position to be handing out the stuff so freely.

Come on, Royal Mail, it’s the survival of the company that’s at stake here. Your planned £1.8bn investment is only to catch up with the competition, and even that’s slipping.

So would I buy fallen Royal Mail shares today? Erm, no.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.

Simply click here for your free copy.

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.