Should I double down on the Royal Mail share price?

Rupert Hargreaves explores if it’s worth going all-in on the Royal Mail share price as the firm’s valuation continues to decline.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

After staging a small recovery at the beginning of September, the Royal Mail (LSE: RMG) share price has fallen back under 200p during the past few weeks. Following this decline, the stock is close to its all-time low of around 188p reached in mid-August. And from a value perspective, its fundamentals look highly attractive.

Indeed, at the time of writing, the stock offers a dividend yield of 8.7%, trades at a forward P/E ratio of less than 8, and a price to book value of 0.45. The big question is, should investors take advantage of this opportunity and double down on the Royal Mail share price? Or might it be best to stay away ahead of further declines? Today, I’m going to try and answer these questions.

Cheap as chips?

In my opinion, any stock trading below its book value is worth a closer look. This implies the business is currently selling for less in the market than its breakup value. Royal Mail fits the bill here. At the end of March, the firm reported total assets of £7.4bn and liabilities of £2.8bn, giving a book value of £4.6bn, or 460p per share. 

Should you invest £1,000 in Royal Mail Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Royal Mail Group made the list?

See the 6 stocks

That might indicate Royal Mail is severely undervalued at current levels, although it doesn’t give us the whole picture. It’s difficult to tell if the assets Royal Mail has on its balance sheet are worth as much as the company says they are. For example, will the firm be able to collect 100% of the money owed from debtors? And would the value of its property increase or decrease if it was used for a different purpose?

Because there are so many moving parts in a book value figure, it’s always best to take this measure with a pinch of salt. Instead, analysts tend to look to a company’s earnings and productivity to determine how much it’s worth.

Falling earnings

Looking at Royal Mail from an earnings point of view, it’s clear the company has problems. Earnings per share are projected to fall 49% in fiscal 2020, after a decline of 45% for fiscal 2019. Meanwhile, return on capital employed — a measure of profitability for every £1 invested in the business — was just 3.9% in 2019. 

Generally, the higher a company’s return on capital, the higher the valuation the market will place on the business. In this case, Royal Mail’s return on capital is in the bottom 50% of the market. To put it another way, the business is one of the most productive public companies trading on the London market right now.

The bottom line

Considering the above, I reckon the Royal Mail share price deserves its low valuation. The company’s falling earnings, coupled with its low level of productivity, suggests the business doesn’t deserve a premium valuation.

Until management can improve the company’s outlook, I think the stock is going to remain depressed. On that basis, it’s probably best to stay away from the stock ahead of further declines.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK 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.

More on Investing Articles

Tesla building with tesla logo and two teslas in front
Investing Articles

The Tesla share price is up 48% since April, but down 19% this year! What’s going on?

Christopher Ruane considers some possible explanations for a sharp recent rise in the Tesla share price -- and a decline…

Read more »

piggy bank, searching with binoculars
Investing Articles

Here’s what forecasts say about the Aviva share price out to 2027

The Aviva share price has made a strong recovery in the past few years, and City experts predict more years…

Read more »

piggy bank, searching with binoculars
Investing Articles

If the stock market crashes, I will buy this under-the-radar AI stock

Nobody knows when the stock market will nosedive next. But one fantastic growth share is on this writer's buy list,…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£20k in an ISA? Here’s how it could be used to target £423 of passive income each month

Earning money from dividends in an ISA is one way to set up passive income streams. Our writer explains how…

Read more »

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

Will the easyJet share price return to its 2021 highs?

The long-term trajectory of the easyJet share price may have escaped some investors. The stock's really depressed, but can it…

Read more »

ISA Individual Savings Account
Investing Articles

Are these the best value Stocks and Shares ISA buys in the whole FTSE 100?

The stock market might be having a strong year in 2025, but I'm still seeing some great value Stocks and…

Read more »

Investing Articles

Is now the time to buy FTSE 100 shares instead of S&P 500 stocks?

The FTSE 100 has beaten 53% of S&P 500 shares over the last two years. Here's a top share I…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

This FTSE 250 stock hit 5-year highs today! Can it keep soaring?

This FTSE 250 stock's risen almost 40% since last summer. Can it keep up its impressive momentum? Royston Wild thinks…

Read more »