Down by half, are Royal Mail shares a recovery pick?

After flying high for a while during the pandemic home delivery boom, shares in Royal Mail (LSE: RMG) have lost more than half their value since last June. In the past year, the Royal Mail share price has tumbled 45%.

That means the postie now delivers a 5.7% yield. A dividend yield like that sounds attractive to me – and in the past few days the share price has been edging up again too. So, are Royal Mail shares a potential recovery pick for my portfolio?

Sagging momentum

It is easy to see why some investors have turned sour on the company. Last week’s trading statement showed that revenues in the Royal Mail division were down 11.5% compared to the same period the prior year. The letters business has returned to structural decline. A rigid cost base led to an adjusted operating loss for the quarter of £32m. Growing industrial unrest could also force the company’s hand on salaries in future, adding to its cost base.

The global logistics business fared better, with a 3% volume decline compared to the same period last year, but a rise in revenue. One sunny part of the company’s prospects is the possibility of growing revenues over the next couple of years.

The company also said that if “significant operational change” is not achieved in the Royal Mail part of the business, it would consider all options including splitting. I do not necessarily see that as a bad thing for shareholders. But it does signal how problematic the company reckons the Royal Mail unit may turn out to be. Perhaps that is just a cynical negotiating ploy. But even if it is, it shows that management is concerned about the operational structure of the Royal Mail business. With costs rising and letter volumes in structural decline, the business model does not look particularly attractive.

What this means for the Royal Mail share price

Royal Mail does not look to me like a very healthy business at the moment. Every part of its business saw a volume decline last quarter compared to the same period the previous year. 2021 was exceptional and the company was able to offset recent volume declines by boosting prices. But the volume declines still concern me. For the Royal Mail unit, at least, I fear they may continue in future.

The firm expects to make an operating profit of €370m-€410m this year, which at current exchange rates would represent a fall of around 40%-45% from last year. That is still well above where it stood before the pandemic. But it is sharply lower than the past couple of years. I think that helps explain the Royal Mail share price declined.

Glooomy outlook

Until the business shows signs of recovery, I see no particular reason to expect the shares to recover. Much lower profits could also threaten the dividend, meaning the 5.7% yield may not be sustained in future. Right now I think Royal Mail shares are not a recovery pick for my portfolio so much as something to be avoided.