Royal Mail (LSE:RMG) shares are a popular investment for both small investors and the professionals. In fact, just over 34% of the company is owned by only 10 funds. That must mean it’s a good stock to own, right?
Not necessarily. Quite often, popular stocks don’t deliver the best returns. So, let’s explore how Royal Mail has performed since going public in late 2013 and whether I should be considering this business for my own portfolio.
A near-decade of Royal Mail shares
Since October 2013, the share price has gone from 450p down to 429p today – a 6% drop. Needless to say, that’s pretty abysmal. By comparison, the FTSE 100 has climbed 12% over the same period. And if I take into consideration the effects of inflation, this performance only gets worse.
But of course, this is only looking at the capital gains side of returns. What about dividends? A £1,000 investment in 2013 would have given me 222 shares (ignoring transaction fees). Assuming I didn’t buy or sell any more over the last eight years, I would have received around £268 in passive income.
This brings my overall investment return to 20.8%. That certainly sounds a lot better. But on an annualised basis, this translates into a measly 2.7% return. That’s barely beating the 2.5% average inflation over the same period.
So, all things considered, Royal Mail shares have frankly delivered pretty mediocre returns, despite their popularity. But will that story change in 2022 and beyond?
What does the future hold?
The performance of Royal Mail shares would have actually been a lot worse if it wasn’t for its recent surge. In fact, over the last two years, the stock is up over 140%!
A lot of this gain is as a direct result of the pandemic. As the demand for e-commerce solutions skyrocketed, management was able to prioritise parcels delivery rather than letters. And it’s proven to be a far more lucrative venture, with revenue jumping by double-digits and profits tripling.
The company is placing particular focus on its GLS division which exposes the group to international opportunities. As it stands, analyst forecasts put operating profits for GLS to be around £350m by the end of March this year. And management has a target of €500m (£422m) over the next three years. That’s more than GLS and Royal Mail made combined in 2019!
Time to buy?
While the historical performance may have been tepid, the future for Royal Mail shares looks far brighter, in my opinion.
There are obviously some risks to consider. International expansion has its own set of challenges, but maintaining margins could be problematic with the cost of labour going up. And since the company doesn’t exactly have the best track record of keeping its employees happy, this could create several headaches.Â
However, suppose the company can hit its targets? In that case, I believe Royal Mail shares could be a considerably better investment moving forward than they were in the past. Yet, as promising as that sounds, I’m not tempted to add any shares to my portfolio today. Why? Because I think there are plenty of other investment opportunities to profit from the e-commerce boom without becoming exposed to the risks of the ongoing labour shortage.