From an investor’s point of view, the recent privatisation of Royal Mail (LSE: RMG) has been a huge success. The IPO was heavily over-subscribed, and all the investors who were canny enough to apply for shares will have made a very good profit.
The share price has been steadily increasing week by week. But, at a certain point, you wonder whether the shares are now fully valued, and if it is time to sell.
A company that is growing profits
When, years ahead, people look back on the story of Royal Mail, I think they will see a company that transformed itself from a bloated, inefficient, loss-making state enterprise to a highly profitable, lean and agile company meeting the future needs of domestic and business customers. The company is, I think, still at the early stages of this journey.
So my view of this company is positive. I expect earnings to steadily climb year by year. But the question is whether this growth is already priced in. Let’s examine the numbers.
The company’s forward P/E ratio is 13, with a dividend yield of 3%. The following year the P/E ratio is expected to fall to 11, and the dividend yield is forecast to increase.
Still cheap
If these numbers are correct, then I would say that the company is, despite its rapid appreciation, still on the cheap side. It is cheaper, on a price/earnings basis, than companies such as Deutsche Post.
This highlights what a bargain this company was at the time of the IPO. Although it is now not the screaming buy it was at the time of the initial offering, I would say the shares are still worth holding on to.
However, there is an argument to say that, because of the relatively low allocation of shares to each private investor, it just wasn’t worth holding on to these shares long-term.
This was one of the reasons why I recently sold my shares. I was happy with my 60% profit after just a month. But I have kept Royal Mail on my watch list, and I would seriously consider buying back in — and buying a larger stake — if there is a dip.
So, overall, you could play this as a short-term, quick-win investment. Or you could think of this as a long-term growth play that you should buy into on any dips.