When Royal Mail (LSE: RMG) floated on the stock market in 2013, there was a parliamentary inquiry into whether the shares had been sold too cheaply.
The shares were sold to IPO buyers at 330p, but closed after the first day’s trading at around 450p. The Royal Mail share price subsequently went on to hit a high of more than 600p.
The only problem is that as I write, the postal operator’s share price is just 240p. That’s more than 25% below the IPO price and nearly 50% below the stock’s closing price on its first day of trading.
If you’d been allocated £1,000 of Royal Mail shares in the IPO, those same shares would be worth just £727 today.
If you’d bought the shares on the first day’s trading, your shares might be worth as little as £500 now.
What should you do now?
Royal Mail stock managed a small pop after the Conservative election victory at the end of the week. But investors in this business will need more than this to justify a long-term holding.
In this article I’ll look at the pros and cons of holding Royal Mail stock and give my verdict on this troubled business.
Don’t forget the income
In my view, the only sensible way to view Royal Mail shares is as an income investment. So far, the postal group has been pretty generous with shareholder payouts.
According to my sums, dividends paid so far have totalled 135.9p per share. Adding these payouts to a share price of 240p gives us a figure of 376p. So an investor who paid 330p per share in the IPO has enjoyed a total return of about 14% in six years.
That’s not great, but hardly a disaster. However, many shareholders will have paid more than 400p for their shares. These shareholders have lost money so far. Although last year’s 25p per share dividend provided some consolation, this payout is expected to be cut to 15.9p per share for the current year.
A tough challenge
I’ve said before that I believe this 500 year-old business will adapt and survive. But chief executive Rico Back faces a number of powerful headwinds.
Levels of automation are low, compared to rival parcel firms. Investment is under way to modernise the group’s facilities, but its large, unionised workforce means that making changes isn’t easy. The threat of strike action is never far away.
This isn’t a political judgement. I can see why the unions would be wary about the changes needed to cut the group’s costs and increase automation. But the reality is that letter volumes are falling and the parcel sector is ruthlessly competitive. I believe changes are essential.
The right time to buy?
The situation isn’t without hope. Royal Mail has nearly 50% of the UK parcel market. I reckon this should provide the scale needed to make its UK-wide network consistently profitable.
The company also has a growing international business, in the form of Parcelforce.
Even after this year’s expected cut, the shares offer a forecast dividend yield of 6.8%. However, the group’s modernisation plans require £1.8bn of spending over the next five years. I fear that Mr Back could be forced to cut the dividend again.
For this reason and others, I don’t see any good reason to buy Royal Mail shares at the moment.
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.