At the time of writing, the Royal Mail (LSE: RMG) share price is currently dealing at a price-to-book (P/B) ratio of just 0.5. A P/B ratio of less than one means the company is worth less than the current total value of its shareholder equity, or assets minus liabilities. As such, it looks as if the stock is currently undervalued.
However, while this metric might look cheap at first, there are some other things to consider. For example, Royal Mail’s earnings are collapsing. City analysts are expecting the company to report a 55% decline in earnings per share for 2020, and a 31% decline for 2021.
At the same time, Royal Mail’s debt is growing. Borrowing has jumped from just £6m at the end of its 2018 financial year to around £1.4bn, according to its latest financial statements.
Both of these trends imply that while the Royal Mail share price looks cheap right now, there’s a good chance that the stock could fall further from current levels if borrowing continues to rise and earnings continue to slide.
With this being the case, if you’re looking for a stock that has the potential to provide you with an attractive passive income stream, I’d avoid Royal Mail and buy homebuilder Taylor Wimpey (LSE: TW) instead.
Economic uncertainty has hit house prices across the UK over the past two years, but recent trading updates from this business show it’s dealing well with the current market malaise.
Earlier this week, the company issued its first trading statement of 2020 updating investors on its performance in 2019. According to the update, Taylor Wimpey achieved record sales and home completions in 2019, with the number of new properties handed over to customers increasing by 5% overall.
And it looks as if the group is set up for a great 2020 as well. The builder ended last year with a record total order book of nearly £2.2bn, a staggering £400m higher than in 2018. This is equivalent to 9,725 homes. By comparison, in 2019, total home completions hit 15,719, including joint ventures. On this basis, it looks as if the firm has the potential to achieve another record performance over the next 12 months.
All of the above is excellent news for its shareholders. The company ended 2019 with a healthy net cash balance of £546m, that’s after paying out £600m to shareholders via dividends in 2019. Management is planning a similar level of distributions in 2020. In particular, last week’s trading update notes: “We remain a very cash generative business and, as previously announced, intend to return £610m to shareholders by way of total dividend in 2020.“
City analysts believe this will translate into a dividend yield of more than 9% for the current financial year. On top of this market-beating dividend yield, is shares are currently dealing at a forward price-to-earnings ratio (P/E) of just under 10, suggesting they offer a wide margin of safety.
These metrics, coupled with Taylor Wimpey’s trading update, imply the company is a much better investment than the struggling Royal Mail.
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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.