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Royal Mail (LSE: RMG) shares have been up and down over the last few months. The Christmas period is a busy time for the postal service and as a consequence, the shares crept up almost 20% during November. However, broaden this horizon to six months and the shares are down 18%. So, is now a good time to invest? Let’s take a look.
The bull case for Royal Mail shares
Royal Mail released its most recent trading update on 18 November. For the half-year ending 26 September, the firm’s revenues climbed 7% to £6.1bn and pre-tax profits rose by over 18 times, totalling £311m. With such encouraging results, it was no surprise that Royal Mail shares surged 7% by market close.
In addition to this, the firm announced it would be paying over £400m to investors. This was done through an immediate £200m share buyback and a £200m special dividend. It was also announced that a £67m interim dividend would be paid. Extra cash paid out to investors is a great way to draw in new ones.
Keith Williams, the group’s non-executive chair, announced that the extra capital generated from an encouraging year would be used to enhance the firm’s technological capabilities. Royal Mail has already begun taking steps towards this, recently unveiling a new fully automated parcel sorting machine at its Tyneside site. The machine can reportedly sort up to 180,000 parcels a day. This will be crucial for managing the busy Christmas period.
And the bear case
Although the new Tyneside machine is helping out during the festive season, the firm has announced it has been struggling to hire enough part-time workers to cover the period. The main reason for this is Covid-19 related sickness and self-isolation issues. Royal Mail is bearing the brunt of this. For example, it has been reported that almost double the number of employees are absent compared to before the pandemic. If the firm can’t get this under control, it won’t be able to fully capitalise on one of its busiest business periods and frankly, it’s running out of time with Christmas just nine days away. This will impact results and could drive down Royal Mail shares.
What’s more, the Omicron variant is likely to further exacerbate this issue. Yesterday, Dr Jenny Harries, head of the UK Health Security Agency, announced that the variant would likely be the “most significant threat we’ve had since the start of the pandemic”. This is bad news for Royal Mail because if the situation keeps escalating, it’s likely to face even more worker shortages. I expect this to drive down the shares due to its effects on its results.
The verdict
I liked the look of how Royal Mail was emerging from the pandemic. A more streamlined workforce, abundant capital, and great results all filled me with confidence. However, Omicron seems to have put a quick end to my optimism. I think the next few months are going to prove tough for Royal Mail shares. As such, I won’t be adding them to my portfolio today.
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Dylan Hood 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.
