Royal Mail (LSE:RMG) has been on a tear this week, with a whole 31% increase in share price as I write, compared to 2020’s average. As a result, it’s now at a one-year high, with much of the increase seen after it posted its trading update on 8 September. On that day alone, the Royal Mail share price increased by 25%.
Royal Mail share price rises on positive update
The update was more upbeat than expected, thanks to superior performance by the company’s parcel business even as its letters business struggled. As a result, it now expects that its 2020–21 revenue can be higher than it was last year. This is a marked shift in outlook from its June update, when it expected revenue to be up to £250bn lower compared to the year before. It also expects Covid-19-related costs to be lower than earlier anticipated.
So far, so good. But is that reason to buy the Royal Mail share at the current price? I’d consider the downsides carefully as well before taking a decision on it. The first point to consider is the ongoing economic uncertainty. Even though RMG’s business is closely linked to the economy, because the latest recession went hand-in-hand with the lockdown, the company’s business actually benefited. But with easing of lockdowns, RMG’s update says that there may be a slowing down in letters and parcels volumes. If we add economic weakness to the mix, then the next few months could be harder for it.
Strained labour relations
Next, its souring relationship with the strong trade union has been a thorn in RMG’s side for a while now. In its latest update it mentions clearly that it’s “disappointing” that an agreement has not been reached for a while now. There’s some room for optimism in this regard however. One, its recent leadership change may well be a positive for the company and the Royal Mail share price. It’s too soon to see the difference. However, two, the trading update also mentions that the group has “increased the intensity of discussions” to make quick progress. These are positives, but until there’s some real breakthrough, I’m not holding my breath.
Last, I’d consider when it will next start paying dividends. The Royal Mail share price was buoyed substantially because of its impressive dividend yield in the recent years. However, the dividend suspension, in line with that seen among many other FTSE companies, sent it tumbling. To be fair, it has recovered since. And it has received another shot in the arm after the latest update. But, I’m not sure if the share price recovery is sustainable because of the uncertain environment it operates in. I’d wait for more evidence of improvement in underlying conditions for RMG before buying the share. In the meantime, I’d consider other FTSE options.
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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.
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