Am I crazy for buying Royal Mail shares?

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So far, 2022 has been a lively and volatile period for global stock markets. At its 2022 low, the US S&P 500 index had crashed almost a quarter (-24.5%) from its record high of 4 January. Meanwhile, the FTSE 100 index hit its year high on 10 February, just two weeks before Russia’s invasion of Ukraine sent share prices tumbling worldwide. So, with stock prices bouncing around like rubber balls, what on earth made me buy Royal Mail (LSE: RMG) shares?

We bought Royal Mail shares in late June

After share prices underwent their usual summer lull, my wife and I decided to do something with our cash pile. This war chest has been growing for months, boosted by share sales and cash dividends. But UK inflation hit 9.4% in the 12 months to June. And higher consumer prices rapidly erode the buying power of our cash. Hence, we took a deep breath and bought 10 new stocks, including Royal Mail shares.

All 10 shares — six from the FTSE 100 index, three from the FTSE 250 and one US stock — were bought for one reason and one reason only. It’s that I viewed all 10 as cheap shares that would produce market-beating dividend income for our portfolio. In other words, we invested in this clutch of companies with the goal of generating extra passive income via cash dividends.

Royal Mail stock still looks cheap to me

As the following table shows, owning Royal Mail shares has been unpleasant for most of the past half-decade:

Five days -2.2%
One month 1.8%
Six months -38.7%
2022 YTD -45.7%
One year -44.2%
Five years -31.0%

Other than a modest comeback over the past month, the Royal Mail share price has been in freefall for long periods. For example, it lost nearly half of its value this calendar year and is down almost a third over five years. But as a value-seeking bargain hunter, finding unloved and undervalued shares is my happy hunting ground. After these sustained falls, here’s how this FTSE 250 firm’s share fundamentals stack up today:

Share price 274.88p
52-week high 531.4p
52-week low 257.43p
Market value £2.6bn
Price/earnings ratio 4.5
Earnings yield 22.3%
Dividend yield 6.1%
Dividend cover 3.7

In its latest fall from grace, Royal Mail shares were relegated from the FTSE 100 to the mid-cap FTSE 250 index. This forced certain collective funds — including index-tracking funds — to sell the shares. And this selling pressure has driven down the stock into Mr Market’s bargain bin, in my opinion. After all, Royal Mail has been around since 1516 as a long-established business. And the relentless rise in parcel deliveries makes it a Foolish long-term investment, in my view.

Am I mad to buy this stock?

I don’t think I’m bonkers for buying shares, as I hope that time will prove me to be cunning or crafty, rather than crazy. After all, Royal Mail’s above-6% cash yield is covered almost four times by earnings.

I could be wrong and red-hot inflation, rising interest rates and slowing growth could send this cheap share plunging once more. Even so, despite Royal Mail’s ongoing issues (including strike action and falling profits), I believe the odds are firmly in my favour. And in 10 years’ time, I hope to be proved right, with luck!

The post Am I crazy for buying Royal Mail shares? appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Royal Mail shares. 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.