I turned positive on the Royal Mail (LSE: RMG) share price in July of last year. In an article published on 20 July, I noted the business has strong brand recognition in the UK and looked cheap compared to its future potential.
I reiterated my case in September, noting the business would likely benefit from surging demand for parcel deliveries in 2020. Both pieces turned out to be extremely well-timed.
Since 20 July, the stock has increased in value by 180%. Since my second call in September, shares in the delivery group are up around 130%.
Over the past 12 months as a whole, the Royal Mail share price has surged 306%.
Parcel growth trends
The company has continued to benefit from the trends I last identified. The online shopping boom during the coronavirus pandemic has boosted its parcel delivery business. Management now expects the group to report adjusted operating profit of £700m for the year to the end of March, more than double last year’s £325m.
Thanks to this robust performance, the group will now pay a final dividend of 10p a share on 6 September.
As well as returning cash to investors, Royal Mail is planning to use some of its windfall profits to bolster its underlying business. The company will expand its parcel delivery and pick-up service and invest more in its UK Parcelforce division and GLS international parcels arm.
This international division has been described as the jewel in Royal Mail’s crown. Operating profit is expected to rise to €500m by 2025. That’s up from €390m in the past year. Of course, these are just forecasts at this stage. There’s no guarantee GLS will hit these targets.
Still, I think these targets show what Royal Mail is capable of. By reinvesting windfall profits back into the business, the company should reinforce its position in the UK and international delivery markets. This could build the foundations for growth for years to come.
Royal Mail share price risks
Having said all of the above, the company does face some significant risks and challenges. Competition in the delivery market is fierce, and rivals such as DPD and Hermes have also been investing heavily in their delivery networks.
Further, Royal Mail doesn’t have the best reputation when it comes to worker relations. If the company has to deal with a strike, or needs to put up wages, its profit margins will suffer.
I should also point out that only 12 months ago, Royal Mail was one of the market’s most disliked companies. It was suffering from falling profits and high costs. After a bumper 2020, the business could revert to its troubled past.
As such, I’d take profits after the recent performance of the Royal Mail share price. The business and City analysts believe the company’s growth can continue. But with competition in the market increasing, I’m not sure. That’s why if I owned the stock, I’d sell it, and I won’t be buying anytime soon.
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Rupert Hargreaves 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.