The Motley Fool

3 things I think could boost the Royal Mail share price in 2020

The Royal Mail (LSE: RMG) share price is down 35% over the past 12 months, and down 70% since a peak in May 2018.

Earnings per share slumped by 33% in the year to March 2019, and forecasts suggest a further 30% drop for the current year. That puts the shares on a forward price-to-earnings ratio of 8.5, which is low. But before you start thinking it’s a bargain, I have more bad news.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

Analysts are predicting a further 40% EPS fall in the 2020–21 year, which would price the shares on a P/E of 14, so maybe not so cheap after all. What would it take to reverse the slump and give Royal Mail shares a boost?

Industrial action

The obvious thing is an end to the threat of industrial action. Without wanting to comment on the fairness (or otherwise) of modern employment practices, it’s a simple fact that Royal Mail in a very competitive environment these days.

The old days of state monopolies and jobs for life are gone. Firms that remain stuck in the same old sixties union-dominated culture will not be able to compete, and will not survive.

Right now, the company and the Communication Workers Union (CWU) are at each other’s throats, with a strike threat in the balance. But with the union having dismissed the RM’s latest offer as an “absolute disgrace,” I’m not optimistic.

In the short term, we need a settlement and an end to the strike threat. In the longer term, we need a change of culture.

Customer experience

Royal Mail has, for years, been falling behind the competition in the service it offers. When I receive parcels from competitors, I’m usually informed of a delivery slot of a few hours at the most. Often it’s just a one-hour window. And increasingly I can watch the delivery on map, and count down how many drops before I get my goodies.

The most recent notification I got from Royal Mail, last week, was effectively “Sometime Wednesday, stay in all day if you want it.”

The company knows it needs to improve, and has plans to do it. But the strike threat is holding it back. Shareholders need to see some progress, and soon.

Big investment

RM needs to invest big and obviously knows it, as its February trading update made clear.

CEO Rico Back said: “We stand ready to invest £1.8 billion to modernise and grow in the UK.” And after suggesting frustration with the CWU, he added that “we cannot afford to delay this essential transformation any longer.”

The trouble is, I see a clash with the company’s cash management and dividend culture here. At the interim stage at 29 September, net debt had ballooned. From £470m a year previously, the total stood towering at £1,372m (though partly due to the introduction of IFRS 16).

At least the company has revised its dividend policy. After a very generous 25p per share last year, shareholders can only expect around 14.4p this year. But earnings continue to fall, and even the slashed payment would still yield 8%.

I think RM’s dividend action is too little too late, and I think it needs to get serious about stemming the haemorrhage of cash.

Will these changes happen in 2020? I’m not so sure, and I’m staying away.

A top income share with a juicy 5% forecast dividend yield

Income-seeking investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!

But here’s the really exciting part…

Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...

He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Income Share… free of charge!

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.