What’s going on with the Royal Mail share price?

With its post and logistics experience, Royal Mail (LSE: RMG) is used to moving things long distances. But in the past year, the Royal Mail share price has also moved a long way – in the wrong direction. It has fallen 44%.

On a surface level, that might look like a buying opportunity for my portfolio. After all, the company has a dividend yield close to 6%. It also enjoys a strong position in its markets, especially when it comes to the UK postal service. But shares do not lose 44% of their value for no reason. What is going on?

Bleak outlook

One way to look at some businesses is to ask, if they did not already exist, would you invent them today? For example, while I think new discount retailers and online sellers will emerge in coming years, I would be surprised if anyone bothers making the effort to establish a new supermarket group to rival the likes of Tesco.

I feel a bit like that about Royal Mail as a company, which consists of two divisions. Its UK mail division is set to suffer from a long-term structural decline in demand. But it still has costly service obligations that reflect its key role in national life, even as mail volumes go down. More positively, its logistics division is in a business area that could see further high growth in years to come. But that has attracted lots of competition, putting pressure on profit margins across the industry.

If I had a blank slate to design my dream business, I would not come up with either of those two operations. I also would not try and run them as a single company.

Royal Mail investment case

But there is a counterargument to what I see as the unattractiveness of Royal Mail in its current form.

Even though mail volumes are declining, they remain substantial. Volumes in the most recent quarter fell 6% compared to the same period the year before. But the business still handled 1.9bn pieces of mail.

The company has pricing power. As a letter writer, recent stamp price increases have seemed excessive to me. But from a business perspective, it may mean that, like tobacco companies, Royal Mail can make profits even while volumes decline.

In the logistics business, revenues for the quarter grew by 8% compared to the prior-year period. An operating profit of £94m for the three months suggests the division is ably handling the challenge of profitability in logistics.

On top of that, the company has floated the possibility of breaking the company into two separate firms.

My move on the Royal Mail share price

So with its juicy yield and price-to-earnings ratio of just five, could buying at today’s Royal Mail share price deliver an attractive opportunity for me?

I am not confident that it would. It might do, as the company has a strong market position in mail and deep logistics experience. But just as a rising tide lifts all boats, an ebbing tide can lower all crafts. Royal Mail is operating in markets that look set to see one challenging year after another.

I think I can invest in more attractive businesses that have the wind in their sails — and their sales.