The Royal Mail (LSE:RMG) share price is surging towards a record high. What’s caused the rapid ascent and should I consider it for my Stocks and Shares ISA? Let’s see what’s going on.
The Royal Mail share price is flying
Over the past year, the Royal Mail share price climbed by over 230%. That’s a phenomenal gain, in my opinion. It has been a transformational year for this 500-year-old organisation. The pandemic significantly changed customer behaviour in 2020. People sent and received many more parcels than ever before.
Parcels now represent 72% of group revenue. This is an increase from 63% a year earlier. The trend of increasing e-commerce and parcels business was already established but it was accelerated by the pandemic.
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Royal Mail recently reported reassuring full-year results. Its parcels revenue grew by 39%, partially offsetting a decline in letters of 13%. Its operating costs also increased, reflecting the need for extra staff and distancing requirements.
Overall, profits increased. This could already be reflected in the Royal Mail share price. So, the question is what happens now?
Royal Mail outlook
Looking ahead, Royal Mail intends to accelerate its programme of change. Several innovations and initiatives have already started or are being trialled. For instance, Sunday deliveries started. It also initiated a parcel collect and drop off service. Offering additional convenience to busy customers should prove popular, in my opinion.
The company is also trialling ‘instant pain relief’ same-day prescriptions, delivery by drone, and several other innovative services.
Business growth often comes from proactive management. A range of trials and initiatives could be exactly the kind of thing Royal Mail needs to become a more modern and powerful force in 2021 and beyond. If it can implement even some of these ideas, I reckon the Royal Mail share price could have considerably more upside.
Risks and points to note
Despite the positive results and reassuring programme of change, there are some points to consider. The outlook for 2021-22 contains a number of uncertainties. Due to this, Royal Mail seems to be finding it difficult to provide specific guidance.
It’s difficult to forecast customer behaviour after pandemic restrictions are lifted. There are also uncertainties surrounding virus variants and their impact on any future restrictions.
In addition, Royal Mail must become more efficient to compete effectively. The Royal Mail share price could be at risk if the company fails to execute cost-management initiatives while delivering high-quality services.
Will it deliver?
Overall, I like what I see. This FTSE 250 stock offers reasonable profit growth, a 3.4% dividend yield, and looks reasonably priced. Royal Mail has an historic competitive advantage of trust at the doorstep. I reckon the various cost-cutting ideas and innovative additions to the offering could deliver further earnings growth.
And despite the strength of the Royal Mail share price this year, I think there could be much further to go. I don’t currently own the shares, but I would be tempted to add some to my Stocks and Shares ISA on any near-term share price weakness.
