Here are four things I believe investors should know about Royal Mail shares.
#1 – Parcels galore
One of the reasons why Royal Mail shares have performed well is due to the rise in online shopping during the pandemic. Coronavirus lockdowns have resulted in an increase in parcel deliveries and I expect this trend to continue well into 2021.
In fact, Royal Mail reported in its recent results that for the first time ever, parcel revenue is larger than its letter revenue. This is no surprise to me as I can’t remember the last time I sent a physical letter by post. I think this is the case for most people and for these reasons, I think sending letters is in a secular decline.
#2 – Infrastructure issues
While Royal Mail shares may be reaping the rewards of the increase in parcel deliveries, it’s not without legacy problems. I think these issues have been raised to the surface once more by the coronavirus crisis.
Over the years, Royal Mail has heavily relied on its shrinking letter business. This has meant a lack of investment in infrastructure for delivering parcels. The huge increase in online shopping and parcels has meant that Royal Mail has struggled to deliver packages on time.
There were reports in the press of the FTSE 250 company suffering a huge backlog of packages during the Christmas period. While I don’t think this has tarnished Royal Mail’s brand, it has highlighted that things need to change and capital expenditure needs to go towards helping it to become a more modern parcels carrier.
#3 – Staff and union members
In my opinion Royal Mail shares have lagged somewhat due to a unionised workforce that has resisted some aspects of modernisation and change that would allow the firm to adapt to current times.
Having said that, in December 2020, the company reached a landmark agreement with staff and union members. This deal was on Royal Mail’s strategy, future direction, operational change, pay and job security. The agreement settles a long dispute between the parties.
While a resolution seems to have been found, I take this with a pinch of salt. It’s one thing agreeing something and another taking action. I would like to see evidence of the agreed points working before I commit to buying Royal Mail shares.
#4 – GLS unit
The Royal Mail share price has benefited from its small international parcels operation, General Logistic Systems (GLS). This division has been growing rapidly and is forecast to deliver 21%-23% sales growth year on year for FY 2020/21.
I think the GLS unit is a currently the growing key gem in Royal Mail’s business. It also could be a key part of the company’s future growth plans.
So will I be buying Royal Mail shares now? No, not yet. While things are improving and the company is taking the right steps, it’s still early days. I think identifying a solution and executing the plan are two very different things. I believe there are better opportunities to invest in.
Nadia Yaqub 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.