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Royal Mail’s share price just tanked again. Here’s my view on the stock now

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The last time I covered Royal Mail (LSE: RMG) shares was back on 10 February when the share price was around 175p. At the time, the FTSE 250 company had just issued a disappointing trading update, in which it advised that the outlook for 2020-21 was “challenging”. That’s not what you want to hear as an investor. As a result, I said that the shares were not worth the risk and that there were much better stocks to buy.

Fast forward to today, and that now looks like the right call. This week, Royal Mail shares crashed again after the company issued another set of poor results. As I write this, the shares are trading at 160p, which represents a decline of nearly 10% since my article in February. Here, I’ll take a look at the latest results from Royal Mail and give my thoughts on the FTSE 250 stock now.

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Large drop in profits

It’s fair to say that this week’s full-year results from Royal Mail were pretty ugly.

While revenue for the year was up 3.8%, profits were well down. Adjusted profit before tax, for example, was down 31% to £275m. Meanwhile, basic earnings per share decreased 36% to 19.6p.

Dividends were well down as well. For the year, the total dividend was just 7.5p (compared to 25p last year), after the board decided not to recommend a final dividend for 2019-20.

No dividend this year

Making matters worse, the guidance for the near term did not look good.

Not only did the company advise that the unprecedented nature of pandemic means the outlook is “challenging and volatile”, but it also said that it expects its UK division (UKPIL) to be “materially loss-making” in 2020-21. Furthermore, it said that it expects to pay no dividend in 2020-21.

Royal Mail also provided two potential scenarios of how the business could perform in 2020-2021. In the first scenario – which assumes a UK GDP decline of 10% for 2020-21 – UKPIL revenue is likely to be £200m to £250m lower year-on-year. In the second scenario – which assumes a deeper recession – UKPIL revenue could be £500m to £600m lower year-on-year.

All in all, these results, and the future outlook, were not encouraging.

Turnaround plan

Now, the company did say that it is going to implement a ‘three-step’ plan in an effort to turn things around. It plans to cut costs significantly, and accelerate the pace of operational change in the UK to address long-standing challenges.

However, we’ve heard these kinds of things before from Royal Mail. So I’d take this turnaround plan with a pinch of salt.

Royal Mail shares: my view

Looking at these results, my view on Royal Mail shares remains the same as it was in February. In my opinion, it’s a stock to avoid.

Forget about the fact that the shares are cheap. This is a company that is experiencing a number of major challenges right now and is likely to continue experiencing challenges for at least a few years, in my view.

And it’s now paying no dividends, so it’s not even a good income stock these days.

I think the best move is to steer clear of Royal Mail shares at the moment.

All things considered, I think there are much better stocks to buy right now, particularly if you’re investing for income.

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Edward Sheldon has no position in any 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.

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