• Mon. Sep 26th, 2022

Did I blunder buying Royal Mail shares last month?

Middle-aged white man pulling an aggrieved face while looking at a screen

As I’ve mentioned recently, my wife and I have been buying shares like mad over the past month or so. Since 29 June, we have bought no fewer than 10 new shares, including one cheap US stock. Of the other nine shares, six come from the blue-chip FTSE 100 index and three from the mid-cap FTSE 250 index. And it’s a FTSE 250 stock I’d like to talk about today: Royal Mail (LSE: RMG) shares.

Royal Mail shares slump

Here’s how the Royal Mail share price has performed over six different timescales:

Five days -2.9%
One month 5.3%
Six months -36.1%
2022 YTD -43.7%
One year -44.1%
Five years -28.9%

Over periods ranging from six months to five years, owning Royal Mail shares has been a thankless task. Even after adding in cash dividends, this FTSE 250 stock has been a bitter disappointment. But when I buy a share, I buy a company’s future and not its past share-price performance. Therefore, about five weeks ago, we bit the bullet by buying into this sliding stock. But did we make a big mistake?

The near future looks painful

For the record, my wife bought Royal Mail shares at 273.2p per share. This is an all-in price, including 0.5% stamp duty and dealing commission. As I write, the stock hovers around 284.77p, so it’s slightly ahead of our buying price.

But the economic background seem to have got a lot worse over the past four or five weeks. UK inflation — driven by soaring fuel and energy costs — has hit a fresh 40-year high. Economic growth is clearly slowing in the UK, US, and Europe. Interest rates seem set to keep rising for some time. And the war for Ukraine rages on and on.

Meanwhile, tens of thousands of Royal Mail staff — members of the Communication Workers Union (CWU) — have voted to strike. They are taking industrial action in order to negotiate higher pay awards. Thus, it seems a summer of strikes is in store, hitting postal deliveries right across the UK.

This stock looks too cheap to me

So did I mess up buying Royal Mail shares recently? I’m not convinced I did, because these share fundamentals look very modest to me:

Share price 284.77p
52-week high 531.4p
52-week low 257.43p
Market value £2.7bn
Price-to-earnings ratio 4.6
Earnings yield 21.6%
Dividend yield 5.9%
Dividend cover 3.7

With a P/E ratio below five and a dividend yield of nearly 6% a year, Royal Mail shares still look inexpensive to me. What’s more, this cash yield is covered almost four times by (trailing) earnings, so it looks very solid (for now, at least).

The big problem with these figures is that they are trailing — backward-looking — numbers. And I’ve no doubt that Royal Mail will struggle against stiff headwinds in 2022/23. Yet I also suspect that some of this bad news has already been factored into the current stock price. After all, the shares stood a whisker short of £6 in early June 2021.

In summary, I’m hopeful that I didn’t buy Royal Mail shares just before they slump further. But if they do, I might buy even more shares!

The post Did I blunder buying Royal Mail shares last month? appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Royal Mail shares. 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.