Royal Mail outperforms US growth market as investors ask: ‘What now?’

The research from eToro found that Royal Mail was the UK’s best-performing large-cap stock over the past year and offered investors more than double the returns of Alphabet, four times that of Microsoft and over ten-fold the performance of Netflix.

However, the data does not include the even more impressive performance of the five-century old postal service, which has returned 293% since the market collapse in March 2020 to 22 September 2021, although it peaked even higher at 379% in June of this year.

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The company found itself at the centre of a scandal earlier this year when several employees came forwards to accuse the firm of “endemic bullying”, which eventually resulted in a £230,000 pay-out for a Royal Mail manager in June of this year.

Engagement

Neville White, head of responsible investing policy and research at EdenTree Investment Management, said the fund house took this as a moment to engage with the management team, which resulted in “new processes being put in place to hopefully resolve any future concerns”. He added the action had been sufficient to “effectively mitigate” the investment risk.

Investors largely agreed and the stock continued to perform strongly in the months following the scandal, although the share price has slipped as lockdown lifted and people were able to purchase goods in person once more.

However, with people no longer stuck at home, Chris Beauchamp, chief market analyst at IG, argued markets are asking “what now?”

“If there was a metaphor for how expectations regarding the economic rebound have gone from manic optimism to ingrained pessimism, then Royal Mail shares would fit the bill perfectly,” he said.

“Having risen for a year, and quadrupling in that time, the wheels have really come off, as the shares drift down below 500p.”

Senior investment and markets analyst at Hargreaves Lansdown Susannah Streeter agreed, arguing that while Royal Mail was “one of the big winners of the e-commerce boom, we have probably passed the short-term high for parcel deliveries”.

“With consumers no longer trapped in their homes with little option than to make purchases online, it was inevitable that the number of parcels sent would slow and there was a 13% fall in parcel volumes in the first quarter,” she explained.

“But we are not fully reverting to all our old shopping habits yet and the structural shift to e-commerce is still going to keep posties busy. Parcel volumes are around a fifth higher than compared to pre-pandemic levels.”

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Streeter added that Royal Mail should be understood as a business with many divisions, and she pointed to its international offering GLS, which is “powering ahead like a juggernaut” compared to its 2019 levels.

Chris Hiorns, head of multi-asset strategies and European equities at EdenTree Investment Management, also discussed Royal Mail in regards to its business divisions and argued parcels present much stronger growth than post.

“On the whole, the postal market is one in long term decline with mail volumes falling as individuals and businesses increasingly switch to email and electronic forms of communications, and even price hikes cannot insulate the business from long term decline,” he said.

“The outlook for parcels is the polar opposite. The growth of e-commerce has driven strong growth in parcel volumes, which was given a strong boost from Covid, which trapped consumers at home and closed retail outlets.

“Interestingly, the strong demand for Covid testing kits has had a positive impact on parcel volumes as the economy has begun to recover in recent months (mail may actually benefit as a buoyant economy encourages more postal marketing).”

E-commerce

Hiorns argued that despite such headwinds as a competitive delivery market and a tightening labour market, Royal Mail remains “well-positioned to benefit from the long-term structural growth in parcels from e-commerce”.

Manager of the Schroder Global Recovery fund Nick Kirrage agreed the uptick in parcels would mitigate the “structural decline in letters” and argued that while Royal Mail still has challenges to negotiate, its strong balance sheet and “prudent management team” will continue to support a strong share price.

“Royal Mail proves that you do not have to pay high multiples to make money in the stockmarket,” he said.

“Here we have a 500-year-old organisation, whose valuation this time last year reflected a huge degree of cynicism, regarded by many as being part of a cohort of old economy stocks, in an old economy market with no exciting future or runway for growth.

“It is not that we knew all of this would happen, but when you buy businesses at multiples that echo doom and despair, any bit of good news can have a significant impact on share prices.”