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Royal Mail shares: why I’m impressed right now

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Chart showing an upwards trend, possibly in the FTSE 100
Chart showing an upwards trend, possibly in the FTSE 100

Royal Mail (LSE:RMG) shares look attractive to me at the moment, mainly because they seem to fit with my investing philosophy for 2022. Part of my personal investing mission for this year involves adding more dividend shares to my portfolio.

There are several reasons for this. The key one is a need to balance risk versus reward. I think I need to add more dividend stocks that provide a steady stream of income, rather than rely on too many speculative growth stocks that may or may not come good.

Royal Mail seem like a good candidate to help me meet my investing goals. Let me explain why I’m so keen.

Growth and dividend potential

To my eyes, Royal Mail shares right now seem to have that nice balance of growth potential sat alongside steady dividend income generation. And this company is generally regarded as being better run now than it has been for years.

Take headline metrics like revenue and profits. These were up in the first half of the current financial year by 7.1% and 10.1%, respectively. The larger percentage increase in profitability over revenue (with profits being £404m for the half year) suggests solid improvements in its operating efficiency.

These efficiency commitments should continue. Royal Mail has invested heavily in improving technology across the business, for example, and is building a new parcel distribution centre that’s due to open in 2023. It will handle up to a million parcels a day, which can only be good for the longer-term future of the business.

Positioned to succeed?

Royal Mail is definitely one of the business winners from the pandemic. The UK public is now shopping online more than ever before, and those parcels need to be delivered. Yet before investing in the stock, I should be aware that recent revenue gains might not be replicated as 2022 wears on. That’s certainly the case if consumers revert to shopping at physical stores as Covid-19 shackles continue to loosen.

This leads me to my next note of caution. It’s stating the obvious, but lucrative industries tend to become more competitive. The company already has plenty of rivals and I should be open to the possibility of the parcel delivery industry becoming even more competitive. This has the potential to impact revenue generation.

I’m reassured on this front though. The aforementioned efficiency investments sees the company putting itself in a better position to compete. This is hugely important to me as an investor. If I invest in Royal Mail, I do so knowing the company is working hard to deliver growth, regardless of what its rivals might do to increase their market share.

It’s a big plus point for me that the stock’s price-to-earnings (P/E) ratio is an attractive-looking 5.9. This is some way below its rolling average since 2013 of 12 or so. This makes me think the company could even be seriously undervalued.

I haven’t even mentioned the dividend yet. The current dividend yield is 3.9%, which certainly wipes the floor with my high street bank account’s interest rate. The more I look at Royal Mail shares, the more I like what I see. I can see this stock being added my portfolio very soon.

The post Royal Mail shares: why I’m impressed right now appeared first on The Motley Fool UK.

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Garry McGibbon 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 2022

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