Is Royal Mail PLC Still A Buy After Its 2013 Bull Run?
2013 has been the year in which even the most hardened stock market bears have admitted that we're in a five-year bull market -- and it's not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 52% higher than it was five years ago. As Christmas approaches, I've been asking whether popular stocks like Royal Mail (LSE: RMG) still offer good value, after such a strong year.
Back to basics
Royal Mail's shares gained 38% on their first day of trading, and haven't stopped since -- they are currently trading at 590p, 79% above their 330p initial offering price.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that "price is what you pay, value is what you get".
Critics of the flotation says that Royal Mail was sold on the cheap, so is there still some value left in Royal Mail at its current price?
|Trailing twelve month P/E||16.3|
|Trailing dividend yield||2.3%|
|Price to book ratio||2.5|
The government's decision to take over Royal Mail's pension deficit is a big help for the firm, but I've stated its operating margin without this £1.3bn paper profit to provide a clearer view of the firm's business.
Royal Mail is planning a 13.3p per share dividend for the current year. The firm says that it would have paid 20p per share for the full year, but has pro-rated the dividend to reflect the fact that the company will have been listed for less than one year when the dividend is declared.
Overall, Royal Mail looks fully priced to me, but not hugely expensive.
Royal Mail in 2014
Next year will be Royal Mail's first full year as a listed company. Analysts' consensus forecasts for next year are very positive, suggesting that institutional investors may see more gains to come from Royal Mail:
|Price to earnings (P/E)||12.9|
In the short term, I agree that Royal Mail may continue to do well, but I'm not so sure about the longer term. It's not yet clear to me whether Royal Mail be able to win a bigger share of the parcel market to compensate for its declining letters business, nor whether it will be able to realise the promised value from its London property assets.
Royal Mail is too speculative for me, and if I'd been awarded shares in the flotation, I'd certainly be selling them now.
Ultimately, the decision on Royal Mail is yours, but if you plan to hold your Royal Mail shares as a long-term income investment, I would strongly suggest you take a look at this brand new Motley Fool special report, "How To Create Dividends For Life".
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> Roland does not own shares in Royal Mail Group.