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The Royal Mail share price continues to rise. Should I buy shares?

Image source: GLS

Royal Mail (LSE:RMG) has benefited from the Covid-19 pandemic. Restrictions have seen a rise in online shopping and parcel deliveries. In turn, the Royal Mail share price has continued to rise since its market crash low and into 2021. Should I buy Royal Mail shares for my portfolio? Let’s take a look.

Royal Mail share price soars post-crash

On the first day of trading in January 2020, Royal Mail shares cost 220p per share. At the height of the crash, just three months later, they had dropped to 124p, a 43% decrease. 

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As I write, the Royal Mail share price has increased by over 365% to 582p per share. In 2021 alone, it has increased over 70%. I believe this rise can be attributed to excellent performance and increased investor sentiment since the crash.

Positive results boost the share price

Last month, Royal Mail announced full-year results. For the 52 weeks ended March 2021, Royal Mail reported a 16.6% increase in revenue across the whole group. Its adjusted operating profit rose by 116%. Royal Mail commented this rise was proportionately equal across its Royal Mail arm and GLS business. Cash flow rose from £556m in 2019-20 to £719m in 2020-21. A dividend of 10p per share was proposed. In addition, a dividend policy was introduced which will see this dividend increase from 10p to 20p next year.

The Royal Mail share price has continued to increase since these results were announced. It is worth noting that Royal Mail’s trading updates each quarter prior to full-year results boosted the share price and investor sentiment as they were largely positive too.

Risks and my verdict

Royal Mail comes with risks and pitfalls. Firstly, its operating costs are increasing substantially year on year. In last month’s full-year results announcement, it detailed an increase of over 9% in operating expenditure. Royal Mail will need to find a way to decrease its expenditure.

Next, Royal Mail’s traditional letter delivery business has been on the decline for some time. A 12.5% drop in letter revenues in its most recent results is concerning but other areas are over achieving, such as the growth of the international logistics business, GLS. I believe this may overshadow the decline in letter deliveries. Letters are a dying art form and I believe this could affect Royal Mail over the longer term.

Finally, competition and the investment needed to keep up with competition is a huge factor putting me off Royal Mail. This specific risk could affect the Royal Mail share price the most in the future in my opinion. Courier services such as DPD and Hermes also saw demand for their services rise exponentially during the pandemic. Consumers may turn to these firms, which tend to offer cheaper and quicker services, especially on the parcel side of things. Royal Mail may need to invest in technology heavily to keep up with such competitors and this could run into the tens of millions pounds.

Overall, I would not buy Royal Mail shares at the moment. I admit the Royal Mail share price has been an interesting journey to follow over the past 15 months or so. Over the longer term, however, there are too many risks and pitfalls that put me off adding Royal Mail shares to my portfolio. 

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Jabran Khan 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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