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The Royal Mail share price is down 60% in 18 months: Here’s what I’d do right now

Rupert Hargreaves
A brown bear sitting on a rock

The Royal Mail (LSE: RMG) share price has plunged a staggering 60%, excluding dividends, over the past 18 months.

These declines have taken the stock down to its lowest ever levels. Today, I’m going to explore whether or not it’s worth taking advantage of the weakness to snap up shares in this UK institution.

Falling earnings

One of the main reasons why the Royal Mail share price has declined over the past 12-months is the company’s falling earnings expectations.

At the beginning of 2018, analysts and management were expecting the company to report a net profit of between £250m and £300m for 2019. However, as the year progressed, earnings expectations collapsed. Royal Mail actually reported a net income of £175m.

Unfortunately, the company’s outlook has only deteriorated further. In November 2018, analysts were expecting the group to report earnings per share of around 27.3p for fiscal 2020. Now the average analyst estimate is just 22.7p, although even this seems optimistic.

A few weeks ago, the company announced that, due to continued margin pressure in its UK parcels and international letters business, this section of the group could lose money in 2020-2021.

Strike action

The last time I covered this stock at the beginning of November, Royal Mail was faced with the threat of a strike in its most crucial trading period after members of the Communication Workers Union voted overwhelmingly for industrial action.

The company has since won a court case to prevent the strike, but this has done little to improve relations with its workers. If anything they are now worse than before.

Deteriorating worker relations are a disaster for management. Lowering costs and improving group efficiency is a cornerstone of Royal Mail’s turnaround plan. If it can’t get the unions onside, management is going to struggle to achieve these aims.

Falling income

The stock’s one attractive quality right now is its dividend yield. At the time of writing, shares in Royal Mail support a dividend yield of 7.6%.

I think this payout is living on borrowed time. If management is serious about the UK division making a loss next year, it makes no sense to maintain the dividend. The company would be better off to cut the payout and preserve its cash, or reinvest the money back into the business to improve efficiency.

The bottom line

Considering all of the above, I think the best thing for Royal Mail’s investors to do right now is to cut their losses and sell the shares. Even though the stock might look cheap at first glance, if the group starts losing money, the share price could fall a lot further. In the worst-case scenario, Royal Mail might even have to ask shareholders for extra cash to reinforce the balance sheet.

In my opinion, it’s not worth taking this risk. There are plenty of other companies out there with stronger balance sheets, brighter prospects, and more secure dividend yields.

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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.

Motley Fool UK 2019