This year has been bleak for the Royal Mail (LSE: RMG) share price. So far, the stock is down 50%. Over the last 12 months, shares in the FTSE 250 courier have plummeted 47%.
So, where will the Royal Mail share price go next? And with this fall, should I be rushing to snap up some cheap shares? Let’s take a look.
Workers walk out
Arguably the most pressing challenge Royal Mail faces in the near future is strike action. After a long set of negotiations, it was recently announced that the company’s workers, represented by the Communication Workers Union (CWU), would strike for four days in the coming weeks.
The action follows calls from staff for wage increases more closely aligned to inflation rates, which recently hit 10% in the UK. And with both parties failing to agree on terms they deem suitable, 115,000 workers will perform walkouts. The first of these will occur this coming Friday.
I see this situation going one of two ways – both of which cause problems for Royal Mail.
Firstly, in the short term, a strike of this magnitude will severely impact the efficiency of Royal Mail’s services, in turn, weighing down revenues. While the business has assured plans are in place to mitigate the staff reduction, I’d expect the strike to bear down heavily on the firm.
On the other hand, while unions are healthy and should be encouraged to create fair working conditions, should Royal Mail succumb to the CWU’s demands this will mean a major rise in labour costs for the firm. With the union’s demands totalling a potential £1bn, this could have a negative impact on Royal Mail in the long run.
Not all down and out
So, the ongoing dispute with workers could be a persistent issue for Royal Mail. Yet despite this, there are a few things that draw me to the stock.
One major pull is its meaty dividend yield. With inflation continuing its surge and rates predicted to peak at 13% this year, cash in the bank is losing more value every day. With a yield of 6.2%, this passive income stream would help me in part beat off inflationary issues.
On top of this, the stock also looks incredibly cheap with a price-to-earnings ratio of just 4.3.
However, a concern for me is its debt. As inflation spikes, interest rates will be hiked. And with its debt sitting at around £900m as of March, Royal Mail may struggle to eradicate this. Where Royal Mail has looked to modernise in recent times, such as through its new coded stamps, this debt may hold it back.
So, where next? And should I be buying cheap shares?
Well, I won’t be buying today. The stock is attractive with its low valuation and high dividend, but with the challenges that it faces in the months ahead, I can see the stock sliding further this year. I’ll be avoiding Royal Mail for now.
The post The Royal Mail share price is down 50%. Where will it go next? appeared first on The Motley Fool UK.
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Charlie Keough 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.