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Why Royal Mail’s share price jumped 36% in November

Edward Sheldon, CFA
·3-min read
Businessman leading a chart upwards
Businessman leading a chart upwards

Royal Mail (LSE: RMG) shares had an impressive run in November. Over the course of the month, the RMG share price rose from 227p to 308p – a gain of approximately 36%.

Here, I’ll look at why Royal Mail shares have risen by so much recently. I’ll also provide my view on the stock now that it is trading at a much higher level.

Why did Royal Mail’s share price rise?

November was an eventful month for Royal Mail shares.

Early in the month, the FTSE 250 stock received a boost when analysts at JP Morgan upgraded the stock to ‘overweight’ from ‘neutral’ and raised their price target by nearly 50%. This put a rocket under RMG’s share price, with the stock having its best day in nearly two months.

Royal Mail shares then received a further boost just a few days later on 9 November when Pfizer announced that it had developed a coronavirus vaccine. This news resulted in a massive flow of money into beaten-up UK stocks. Royal Mail certainly wasn’t the only share to jump. Other popular stocks such as Lloyds Bank, Legal & General, and easyJet also rose significantly.

Then on 19 November, Royal Mail posted an encouraging set of half-year results for the period ended 27 September. While profits were down significantly, revenue was up nearly 10%, boosted by online shopping deliveries. And in a positive development, the group raised its full-year revenue forecast. It now expects revenue to be £380m to £580m higher year-on-year.

Finally, late in the month, the shares received more upgrades from City analysts on the back of half-year results. In the space of just a few days, there were upgrades from Credit Suisse, JP Morgan, and Bank of America.

My view on RMG shares now

I’ve said before that Royal Mail is not a stock I’d want to own for the long term. There are a few reasons I don’t like the FTSE 250 firm.

First, I believe that the company is going to continue to experience structural challenges. It has admitted recently that its delivery structure “no longer meets customer needs.” Ultimately, it needs a massive overhaul.

Second, it doesn’t have a good track record when it comes to profitability. Over the last three years, return on capital employed has averaged just 3%. That’s poor. It shows that Royal Mail earns a very low return on every pound invested in the business.

Third, after advising that it will pay no dividends this year, it no longer has a dividend growth track record. I like companies that can demonstrate excellent long-term dividend growth, such as Unilever and Diageo.

With that said, I think the best approach towards Royal Mail shares is to be selling while the share price is high. If I owned the stock, that’s what I’d be doing. I’d then look at deploying the proceeds of the sale into higher-quality, lower-risk stocks that have more long-term growth potential.

The post Why Royal Mail’s share price jumped 36% in November appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Unilever, Diageo, Lloyds Bank and Legal & General Group. The Motley Fool UK has recommended Diageo, Lloyds Banking Group, and Unilever. 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 2020