The past 12 months have seen around a 230% rise in the Royal Mail (LSE: RMG) share price, in part due to a surge in deliveries during the Covid-19 pandemic. My fellow Fool Cliff D’Arcy looked at the RMG leap back in May, and it has not stopped from there. Here, I am going to be assessing whether I should be adding this stock to my portfolio after its FTSE 100 renaissance.
Why is the share price rising?
There are multiple factors as to why the Royal Mail share price has risen. Firstly, in March this year Royal Mail’s subsidiary, GLS, announced its plan to double profits by 2025. Since then, the share price has seen a 15% rise. I think this is a clear sign of investor confidence.
To add to this, the pandemic has boosted revenues. The 52 weeks ending March this year saw a 38.7% increase in parcel revenues. Although this was offset by a 12.5% drop for letters, I think this provides a positive sign for the future. People have adjusted to shopping online during the past 18 months and I can only see this continuing. The ease of doing so is a sensation shoppers will now be accustomed to, which provides opportunities for the future of the Royal Mail share price.
Royal Mail share price risks
The last year has been solid for Royal Mail, to say the least, however, I do still have my doubts. First, the 12.5% drop in letter revenues may have been overshadowed by higher performances in other areas, but this could provide a problem, with it predicted to continue to decline. Should Royal Mail be able to develop their other services, such as parcels, this should not provide an issue. However, it is worth taking into consideration.
Further challenges could be met through the form of competition. Courier services such as Hermes and DPD also experienced a boom during the pandemic. Royal Mail share price could suffer if consumers decide to switch to alternatives that offer cheap and quick services, especially parcels.
Another issue arises in the form of capital expenditure. A recent announcement stated the investment of over £400m into RMG’s parcel infrastructure – an outlay that could negatively impact profits for the foreseeable future. This also means investor dividends may take a short-term hit.
My outlook
It is clear RMG has had a brilliant past 12 months, although a few factors worry me. The drop in revenues in certain areas is a concern. Partnered alongside the competition Royal Mail faces, it is a must that it continues to develop its services in the future to maintain current performance.
With that said, although on the surface a £400m investment may harm short-term profits, it shows RMG is planning for the long term. Myself being a long-term investor, this fills me with hope for the Royal Mail share price and what it may have to offer.
Currently sat at around 592p, with I believe the potential to rise, I see this as a good opportunity to buy RMG for my portfolio.
