Should I snap up Royal Mail shares at 259p?

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It’s been a rocky road for Royal Mail (LSE: RMG) so far in 2022. Having fallen over 50% year to date, the stock currently sits at just 259p. This fall in share price movement and subsequent shrinking of its market cap pushed the company out of the FTSE 100 index in June this year. Broadening the horizon to a 12-month span, the shares have tanked 47%. So, with this in mind, is now the time to buy the shares? Or should I avoid adding this FTSE 250 UK courier to my portfolio?

Union action

One of the most pressing issues plaguing the group is the threat of strike action. Royal Mail has been in a long dispute with the Communication Workers Union (CWU) over pay. With no firm agreement reached, it was announced that Royal Mail workers would strike for four days in the next few weeks.

The strikes come after months of red-hot inflation, which most recently hit 10.1% in the UK in July. Rising prices are vastly outpacing wages and magnifying the cost-of-living crisis. It’s estimated that 115,000 workers will partake in the strike action, which will place momentous pressure on Royal Mail’s operations.

Disruption to operations is a short-term issue, but I still expect a big impact on the firm’s revenues. However, over the long term, it places even more pressure on the group to reform pay packages. Royal Mail currently employs around 180,000 staff. Even a small increase in wages would add millions in operating costs. The courier operates with slim 5% profit margins, so higher wage costs for it are a big issue.

Interest rate pressure

With inflation and interest rates on the rise, it has created a far from favourable market environment for Royal Mail. The group has high debts, low cash flow, and is loss-making. This makes it a pretty risky investment. As rates rise, people turn away from speculative assets like risky stocks and pour their money into safer ones. As rates continue to rise, this could put additional pressure on Royal Mail shares. Also, with over £900m net debts on its balance sheet, and those thin margins, rising rates are something the group simply cannot afford.  

A bargain buy?

One positive I see for Royal Mail shares is their cheap valuation. Currently trading on a price-to-earnings ratio of just 4, the stock looks astonishingly cheap – especially considering the FTSE 100 average P/E ratio of 14. In addition to this, it packs a meaty 6.4% dividend yield, which could be great for adding passive income to my portfolio and acting as an inflation hedge.

Yet while the shares are cheap and the dividend is high, there are too many red flags for me to buy this stock. Strike action poses a big threat to the firm’s income, as well as potentially forcing it to vastly increase its expenditure. Inflation and interest rates pose a similar threat. For those reasons, I won’t be buying any Royal Mail shares today.

The post Should I snap up Royal Mail shares at 259p? appeared first on The Motley Fool UK.

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Dylan Hood 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.