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Extreme stock market volatility in 2022 has washed out many top UK shares. But the Royal Mail (LSE: RMG) share price has performed particularly badly as investor confidence has crumbled.
The former FTSE 100 share has lost a whopping 46% of its value since the start of the year. And more share price weakness could be coming too as Britain’s economy tanks. This could cause letter and parcel volumes at the courier to tank.
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A dirt-cheap UK share
That said, the Royal Mail share price does look exceptionally cheap on paper. And this could tempt many a value investor to dive in.
Today the business trades on a forward P/E ratio of just 7.2 times. Royal Mail shares also carry a mighty 7.5% dividend yield for this financial year (to March 2023). City analysts think the company will raise the full-year dividend to 20.5p per share, up from 20p last time.
Risks to Royal Mail
But is the cheap Royal Mail share price worth the gamble? Some of the things worrying me about the FTSE 250 share include:
1) Industrial action
The prospect of industrial action has always been a thorn in the side of Royal Mail.
Yet the business seems to be at a particularly worrying juncture right now. According to Chairman Keith Williams, current discussions between the company and unions have “run out of road”.
Royal Mail faces two unenviable choices. One is to accept strike action that will paralyse trading. The other is to cave and pay workers higher than the 5.5% it said it has proposed, pushing its wage bill to eye-popping levels.
Williams told The Sunday Times that even that offered 5.5% pay rise will propel the group’s £5.5bn wage bill up by £250m.
2) A slumping UK economy
Royal Mail’s operations are highly sensitive to broader economic conditions. And as I say delivery levels could start to sink as global growth slows.
I’m particularly worried about the business given its dependence on a strong UK economy. Conditions here are predicted to be particularly grim over the next 18 months (the OECD is tipping zero growth in 2023).
3) Rising competition
The growth of e-commerce means that competition in the parcel delivery market is heating up.
Royal Mail has been expanding its own global footprint though its General Logistics Systems division. The business now operates in North America as well as Europe. However, other industry giants also continue to expand rapidly.
DHL, for instance, just announced plans to create 3,500 new jobs in the UK alone.
The verdict
I like the brilliant value that Royal Mail offers. I also like its sprawling global operation and its important role in e-commerce. I think this could deliver exceptional profits growth as shopping habits change.
However, in my opinion the risks the company faces remain far too severe and numerous for my liking. For this reason, I’d rather buy other UK stocks with more solid growth prospects.
