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Here’s why I’d invest in Royal Mail share price after its 7% rise

Manika Premsingh

The share price of postal service provider Royal Mail (LSE: RMG) reached a six-month high Wednesday, following a court decision in its favour. The decision stops workers from striking during the upcoming election and Christmas season.

At 230.8p, the share price was up by almost 7% in one week alone, which is good news at a time when things have not really been going in RMG’s favour. It softened somewhat in yesterday’s trading session, but the fact that it reached the high is enough reason to highlight the share.

A perfect storm

RMG tumbled out of the FTSE 100 list in December last year after issuing a profit warning, which had an impact on its share price. Royal Mail Group’s leadership has also been a game of musical chairs recently. The chair has changed three times since 2018. Its current CEO, Rico Back, also took up his position recently, in the last year. Last but certainly not least, is the ongoing dispute between the company management and its strong workers’ union.

Positives stack up

Yet, I think there’s much to appreciate about this share. Here are a few points I’ve been considering while this stock has been on my watch list:

#1. Strike sensitivity: The latest court order in Royal Mail Group’s favour is not the first one. In October 2017 the courts also intervened against a strike. Soon after that issue was resolved, share prices shed their previous inertia and started rising sharply. They came back to the levels seen that October only after another year had passed. And as they say, sometimes the best indicator of the future is the past, which makes me hopeful.

#2. Short-term pain: The share price was impacted in May this year when Royal Mail Group cut its dividends to 15p a share for next year down from 25p. I can see why that disappoints shareholders, but so long as the dividend cut is going towards investments and improved efficiencies, which is the company’s stated goal, it’s a short-term pain for long-term gains. In any case, this didn’t the impact share price for very long, possibly as the full import of the results, also announced on the day, was absorbed.

#3. Slow and steady: Its annual results showed some rise in revenue, a continued trend for the past few years and one I like. Earnings are also positive, though reported earnings are far more robust than adjusted ones, which showed softening. In its outlook it continues to expect to make progress even if not at speed. To my mind, this is a positive.

I don’t think this is a share to bet life savings on because there’s still much that the company needs to resolve for good, but I do think that it’s a little too beaten down. Royal Mail Group’s latest price levels are 26% lower than the highest seen over the past year. After the court order I think its share prices will start rising from now on. The opportunity for the investor to buy is now.

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Manika Premsingh 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 2019