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Can the Royal Mail share price keep on delivering?

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·3-min read
A Royal Mail GLS delivery man
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Throughout 2021, the Royal Mail (LSE: RMG) share price has performed well, rising 60%. Further, its current price of nearly 600p is a rise of 370% since its lows in April last year. This strong performance has been driven by a willingness among management to implement changes, which has also been accompanied by rising profits. Is this now a chance to cash in profits or can the Royal Mail share price continue delivering?

Recent trading update

To say the least, the recent full-year trading update was good. The company had previously feared material losses, yet instead posted an operating profit of £702m. This was 116% higher than the year before. As such, the full-year performance was far higher than expectations, and the Royal Mail share price has performed excellently since.

The recent trading update also demonstrated the potential of its subsidiary, GLS. This delivers parcels and has, therefore, been able to capitalise on the growth in e-commerce. Indeed, this subsidiary has accounted for just over half of the group’s profits, and with e-commerce still in its ascendancy, I believe that there is opportunity to grow this further.

Finally, the group’s strong performance and optimism for the future was highlighted with a one-off final dividend of 10p for the 2020-21 year. A dividend of 20p per share has also been proposed for 2021-22. This equates to a yield of over 3% and is strong in comparison to many other UK stocks. It also demonstrates that the company is confident about its position for the future.

Risks

Although there is a significant amount of optimism with the Royal Mail share price right now, risks do still remain. For instance, as a former state-owned company, Royal Mail has been involved in a number of disputes with its staff and trade unions. This has occasionally hindered the company’s ability to modernise. It has equally allowed other delivery services to increase their market share at the expense of Royal Mail. As such, there is always the risk that Royal Mail will struggle to achieve further growth in the future.

There has also been the decline in the company’s letter service, and revenues in this area were down 12.5% in the recent trading update. It is expected that this area of the business will further decline. Provided that the parcels service is able to develop, this should not be a significant problem, yet it is still a risk to point out.

Can the Royal Mail share price continue delivering?

In the past, I have stayed away from Royal Mail shares due to the aforementioned risks. Nonetheless, after its recent trading update, I am far more positive. Indeed, it seems that management has become willing to make changes, and these have been extremely effective. A strong dividend to accompany the stock is also very tempting. Although I feel a short-term correction may be incoming, the long-term future of the company looks fairly bright and I feel that the Royal Mail share price still has upside potential. This means that I may add Royal Mail shares to my portfolio soon, especially if it dips slightly in the next few weeks.

The post Can the Royal Mail share price keep on delivering? appeared first on The Motley Fool UK.

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Stuart Blair has no position in any of the shares 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 2021