Skip to content

Royal Mail facing industrial action costs of £80m


Royal Mail LSE:RMG has hardly been delivering over the last year. Currently languishing at around 273p, the FTSE250 listed UK postal and courier service closed 2021 at 481.3p and has offered a year-to-date return of -45.2%, with a one-year return of -44.8%, with its shares ranging between 255.5p and 531.4p over 52-weeks.

The company is valued at a market capitalisation of GBP2.6bn. The company had to deal with the ignominy of relegation from the FTSE100 to FTSE250 in June of this year and owning shares in Royal Mail has been an unpleasant experience over the last five years with the share price hardly moving since it was 286.8p in August 2017.

Since the beginning of the year, Royal Mail has posted lots of negative news, as its earnings have been hit by rising costs and a decline in demand for parcel deliveries as Covid-19 restrictions have been relaxed. It seems that the art of letter-writing is dying out as the world turns to WhatsApp, Telegram and other more instant forms of communication.

In July Royal Mail’s chief executive, Simon Thompson said the company was losing GBP1m a day announcing adjusted operating losses between April and June of GBP92m and a fall in revenue of 11.5%. Thompson blamed plunging deliveries of Covid-19 test kits and items bought online plus a long-term decline in letter deliveries and a “disappointing performance” in making the business more efficient.

Royal Mail walk out will not help investors

Earlier this month Royal Mail published notification from the Communications Workers Union that it intends to call upon its members to take strike action for 24 hours for two days in August and two days in September. Thousands of Royal Mail workers will subsequently walk out in a dispute over pay in what could be the biggest industrial action of the summer, and this will have a material loss on the postal service with some estimates putting the cost of industrial action at GBP80m.

The CWU and Royal Mail management seem to be set at loggerheads. Management has threatened to split up the company between domestic and international business and offered its employees a pay rise of 5.5% in exchange for making “significant operational change” and “transforming the way we work.” The company has cut back on overtime and the use of temporary workers, but had not been able to cut costs quickly enough to match the lower volumes of parcels and letters.

The union called management “pathetic” claiming the 5.5% pay rise was only 2% in real terms, given the cost-of-living pressures and inflation in the UK. Dave Ward, the CWU’s general secretary, said: “While bosses rake in GBP758m in profit and shareholders take GBP400m, workers are expected to take a serious real-terms pay cut.”

He continued, saying the union was not opposed to modernisation, “but modernisation seems to be about workers having to work harder and faster for less pay”.

International Distributions Services

Given management’s comments on the separation of business units, it seems pretty-much nailed-on that this will happen sometime down the line. They even have a new name: International Distributions Services. Although the structural issues remain for Royal Mail, they have a value story for the investor. Royal Mail’s above 6% cash yield is covered almost four times by earnings. The company has been around since 1516, and the decline of the High Street is seeing more parcels delivered, so although letters might be something of an anachronism, parcels are very modern.

As to whether Royal Mail can modernize quickly enough to keep pace with the likes of Amazon who are now a more-trusted delivery brand than the Royal Mail amongst consumers remains to be seen.

Royal Mail shares are definitely unloved. Current prices are almost GBP1 lower than when the company debuted on the stock market in October 2013, whereas the cost of a UK first class stamp has gone up over 58% in that period to 95p today.

As to whether Royal Mail shares are undervalued, it remains to be seen.

Looking for great investing ideas? Sign up to our free newsletter.

This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

'How to' Guides

Our latest in-depth company reports

Detailed reviews of selected companies and investment trusts.

On the podcast

Sign up for great investing stock tips

Thanks to our Site Partners

Our partners are established, regulated businesses and we are grateful for their support.

CME Group
FP Markets
Back To Top