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Tempted by the Royal Mail share price? Here is what you need to know

20 Jul 2020, 15:25

Tempted by the Royal Mail share price? Here’s what you need to know

Rupert Hargreaves | Monday, 20th July, 2020 |

The Royal Mail (LSE: RMG) share price has been one of the worst-performing stocks on the London market this year. Year-to-date, shares in the postal services group have dipped by around 20%.

Following this decline, some investors may be attracted to the business because the shares look cheap compared to history. However, there are several things investors should be aware of before buying.

Is the Royal Mail share price cheap?

At 180p, the stock is trading close to its all-time low. This doesn’t necessarily mean the company is a good investment today. Indeed, the business is facing multiple headwinds, which could hold back its recovery.

For example, the group recently lost its CEO and management’s relations with workers have been at rock bottom for years. On top of this, trends in the mail market are hurting the company’s bottom line. The number of letters being sent is declining every year, and this is weighing on growth.

To try and help stimulate top-line growth, management has been working to improve Royal Mail’s parcels business. The rise in online shopping means this part of the business is booming. Unfortunately, the company’s competitors have also so been trying to grow their presence in this market. As a result, the firm has struggled to achieve its aims.

Royal Mail’s international division, which was supposed to help return the group to growth, also hasn’t lived up to expectations. Some investors have called for the company to spin-off this division as a result.

As growth has languished, the organisation has had to cut its dividend to try and preserve cash. Royal Mail used to be one of the top dividend stocks on the London market. But it could be some time before the company retains this crown. Analysts expect the dividend to be substantially reduced for the foreseeable future.

Considering all the above, while the Royal Mail share price does look cheap at current levels, it may be some time before the business returns to growth. This could mean investor sentiment towards the company remains depressed for some time.

Buying for the long term

That being said, investors with a long-term time horizon might benefit from buying the stock today. Royal Mail is facing several short-term headwinds, but the company continues to dominate the UK postal market. It’s unlikely to lose this competitive advantage anytime soon.

Also, the Royal Mail share price is currently changing hands at a price-to-book (P/B) value of just 0.3. That’s compared to the market average of 1.2. As such, it looks as if the stock offers a wide margin of safety at current levels.

Therefore, even though the business is facing many short-term headwinds, considering the company’s valuation and prospects, long-term investors may benefit from buying the Royal Mail share price today.

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