The iconic red letter boxes, red vans, and postal workers in red jackets are somewhat of a red herring these days.
The mail and parcel business is a very competitive and unforgiving industry as Royal Mail (LSE:RMG) is finding out. At the time of writing, Royal Mail share price has lost almost 35% in value in the last 12 months.
Inception and history
The Royal Mail’s roots can be traced back to 1516, when a certain Henry VIII ruled the country, however, it was not made available to the public until 1635. The first post office pillar box was erected in 1852 in Jersey and the following year they were rolled out throughout mainland Britain.
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For the majority of its lifespan, the Royal Mail was a government-run organisation, but in 2010, the then-business secretary, Vince Cable, began the process of privatisation. In 2013, Royal Mail was floated on the London Stock Exchange and one could argue this is where its problems began.
The share price rose by 38% on the first day of trading, leading to accusations that the company had been undervalued. Six months later, the market price was 58% above the sale price, and it peaked as high as 87%. Much of this profit was acquired by large investors, such as pension funds and hedge funds, that were given priority during the allocation of shares.
The UK government initially retained 30% of shares but sold all its shares in 2015, thereby ending almost 500 years of state ownership.
Recent performance and issues
Royal Mail’s performance over the last 12 months has been nothing to write home about. The recent trading update at the end of 2019 showed the previous nine months performance. One piece of positive news (a revenue increase of 3.7%) was followed by a multitude of excuses for incoming poor performance.
A profit expectation of between £300 and £340m for the year ending March 2020 fell in line with expectations but still, no growth to get excited about.
Royal Mail referred to the following financial year as a “challenge” which never bodes well when the year has not started yet. The usual nod towards economic uncertainty and delays in transformational plans further deepened fears about the direction of the company. The proverbial nail in the coffin was its admission that 2020–21 could be a loss making year.
Where Royal Mail is concerned, talk of strike action is never far behind. The Communication Workers Union (CWU) has spoken of broken promises and being let down too many times. Royal Mail had to prevent a mass walkout at Christmas (its busiest time of the year) by obtaining a high court injunction. Another tell-tale sign of a company in disarray.
What I would do now
The rise of rivals such as Amazon Logistics, and the potential market share they could gain as time goes on, coupled with talk of industrial action and an internal admission of an upcoming potential loss troubles me. I would stay away from Royal Mail as an investment and perhaps revisit if many things change.
