Back at the start of the month, the Royal Mail (LSE:RMG) share price hit fresh 52-week lows at 257p. Even with a slight rally in the past couple of weeks, it still means that Royal Mail shares are down 44.6% over the past year. With issues around unions and operational delays, is now the time for me to buy, or should I sit on the sidelines?
The case for staying away
One concern I have at the moment is the proposed strikes over pay and job security. Over 115,000 workers backed the strike, along with union support. At the moment, confirmed dates for the strike haven’t been announced.
The issue this causes for Royal Mail is reputational damage. Not only this, but also disruption on the days when the strike occurs. Although the business has come out and said that it has contingency plans, it’ll still have a negative impact on operations with that scale of a walk-out.
Another problem the company has is the pandemic boost is now fading away. In the recent Q1 results, revenue was down 11.5% versus the same period last year. Contributing factors included “weakening retail trends, lower test kit volumes and a return to structural decline in letters”.
I think it was always inevitable that the hit would come, as Covid-19 wasn’t a situation that was going to stay for many years. However, it’s still tough to see the falling revenue at a time when the business needs to try and keep the momentum going.
Why Royal Mail shares could move higher
Royal Mail as a group is actually made up of Royal Mail and GLS. Even though Royal Mail is struggling, GLS is performing well. It generated an operating profit of £94m for Q1, in line with the previous year. Looking forward, it’s aiming for revenue growth for the rest of the year, with a profit in the region of £309m-£348m.
This European division clearly is taking advantage of its position in the market, and is helping to support the group as a whole. If the management team can focus investment in this area, then it could help to continue to offset the Royal Mail performance. Then if the issues here in the UK can be rectified, the group overall can be in a much stronger place down the line.
Another point why I could buy now is due to the low price levels. This helps to lower the price-to-earnings ratio, which sits at 4.80 at the moment. Anything below 10 makes me interested in a potentially undervalued company, so 4.80 ticks this box.
Further, the fall in share price helps to push up the dividend yield. This is 4.79% currently, well above the FTSE 100 average. I’ll have to see how the dividend per share changes in the near term, but if it stays at current levels then this could be a nice buy for my income portfolio.
However, despite the attractive valuation, I think the issues around strikes could hurt the share price more in coming weeks. Therefore, I’m going to sit aside right now and wait before investing.