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When I am looking for investments to add to my portfolio, I like to concentrate on companies that have a captive market. And this is why I have recently been eyeing up Royal Mail (LSE: RMG) shares for my portfolio as an income and growth investment.
Income and growth investment
Royal Mail has a captive market across the UK. The company is the premier parcels and letter delivery group for the country. While there are competitors in the market, the corporation has the most extensive network and an obligation to provide a service to every home in the country.
In recent years, the group has been investing heavily to double down on its position in the market.
These investments are starting to pay off. Management’s decision to invest more in the parcel business, pick up parcels from consumers’ homes and build parcel postboxes has really helped the group capitalise on its countrywide network and booming e-commerce market.
Before the pandemic, the company was not really focusing on these growth markets.
Today, it is. And this is starting to show through in the enterprise’s sales and profits.
Royal Mail shares look cheap
According to City analysts, the corporation is expected to report earnings growth of 7.4% in 2022. This evolution is even more impressive considering the fact that the company reported earnings growth of 93% in 2021.
So not only is the business growing, but it is growing off a high base as well. Unfortunately, analysts have pencilled in a modest decline in earnings for the 2023 financial year, currently projected to contract by around 2%.
However, it is important to consider that even after this decline, earnings will have increased substantially over the past three years. Based on these projections, Royal Mail shares are currently selling at a forward price to earnings multiple of just 5.8.
On top of this, management has committed to paying out around half of the earnings in dividends for the year ahead. Based on these projections, the stock could yield 8% this year.
The bottom line
Considering these metrics, I would be happy to buy the stock for my portfolio today. With further growth initiatives in the pipeline and considering the outlook for the e-commerce market, I think the business will continue to register strong growth in both its top and bottom lines over the next five to 10 years.
That said, the company will face some challenges as we advance. These could include rising costs, which will hit profit margins and competition in the sector.
While the business has been making significant investments to try and get around competitive forces, they have not disappeared. The parcel market in the UK is incredibly competitive. That is not going to change any time soon.
Royal Mail needs to keep ahead of the competition or it could be left behind.
Despite these risks and challenges, I would buy Royal Mail shares for their income and growth potential right now.
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Rupert Hargreaves 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.
