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Why is the Royal Mail share price climbing?

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Image source: GLS

Royal Mail (LSE: RMG) shares have solid momentum. Over the last 12 months, the Royal Mail share price has risen over 200%. In just the last three months the shares have gone from around 519p to 606p at the time of writing.

What’s driving the share price up?

There have been a few catalysts for the improvement in the Royal Mail share price. Plans to double profits at its international arm, GLS by 2025 no doubt pleased investors. The share price performance has been strong since that announcement at the end of March this year. Even better it was accompanied by plans for a special dividend to shareholders.

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An investor, Czech businessman Daniel Kretinsky, has also built a significant stake of at least 15% in the postal group. That will have helped the share price and perhaps have motivated other investors to buy in to Royal Mail’s recovery.

Media regulator Ofcom has paved the way for a reduction in the universal service obligation from six days to five. This would make Royal Mail much more competitive.

Royal Mail has also been able to increase its guidance for its results, something that investors like to see. Alongside a special dividend, it shows confidence in the future from Royal Mail’s management.

Alongside all this, an increase in e-commerce has pushed up demand for parcels delivery. As a result, Royal Mail reported great full-year results. Revenue rose by 16.6%, while adjusted operating profit increased by 116%.

On top of this past performance, one short-term driver of the share price will be its return to the FTSE 100. This means trackers of the elite UK index will have to buy the shares. There’s the possibility the shares could continue to do well then, at least in the short term.

Finally, when it comes to value that looks quite promising as well, the shares trade on a forward P/E of only 11.

Would I add Royal Mail shares? 

Clearly there’s a lot going on at Royal Mail and plenty for an investor to potentially like. After a long period in the doldrums, the share price is doing well. And yet I’m not convinced by the idea the shares will do well long term.

I think the share price rise is overdone. Royal Mail is still not the kind of high-margin business with a bright future and the potential to deliver strong passive income, which I’d want to add to my portfolio. It has a low return on capital employed, which I use to determine the quality of an investment.

One other risk is that revenue is expected to fall next year. So, despite the strong momentum, I won’t be buying Royal Mail shares. It may be more appropriate for value hunters (despite the share price rise in recent times) and contrarians. But it’s not for me.

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Andy Ross 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.

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