Is the Royal Mail share price heading back to 400p in 2019?

question marks written reminders tickets
question marks written reminders tickets

When I suggested in November that the Royal Mail (LSE: RMG) share price could drop below 300p, I was hoping to be proved wrong. Unfortunately I wasn’t. The shares have continued to tumble and were trading below 300p at the time of writing.

However, recent news from the firm has made me more comfortable holding the shares ahead of a possible recovery. Let me explain.

Director buying

When top executives spend their own cash buying shares in a company they run, it’s generally a good sign. After all, they aren’t (usually) required to buy.

One big boss who’s been buying heavily recently is Royal Mail chief executive Rico Back. He’s spent nearly £1m of his own cash buying shares since 19 November. The average purchase price was 302p, so he’s in line for a dividend yield of 8.1% per year (about £76k), if he can avoid cutting the payout.

In my view this is far from certain. I think a dividend cut is increasingly likely, if not this year then during the 2019/20 financial year, which starts at the end of March.

Buying for a recovery?

I’m sure that Back expects to generate a positive return on his near-£1m investment. But I don’t think we’re going to see the shares bounce back to 400p next year. As I explained recently, Royal Mail faces a number of potentially costly problems.

Back is planning to unveil a new five-year strategy for the group in March. In my view, that’s the kind of horizon investors will need to enjoy strong returns on their investment.

I see his share purchases as a reassuring sign of commitment and confidence. But I’d only buy the shares at this level if you’ve got the time and patience to stay invested for the long haul.

A £2.3m director buy

Back isn’t the only FTSE director who has been splashing the cash. TalkTalk Telecom Group (LSE: TALK) executive chairman Sir Charles Dunstone has spent £1.7m since November buying shares in the broadband provider he founded.

Sir Charles also spent another £570k back in the summer, taking his total spend this year to a chunky £2.3m. With a reported net worth of around £1bn, he can probably afford it. But Dunstone already owned a 28% stake in the firm, so I’d view his purchase as a vote of confidence in his turnaround plans.

Is it time to start buying TALK?

I’ve been cautious about investing in TalkTalk, viewing the firm as “a tempting turnaround” but with too much debt. The stock has traded in a range between 100p and 130p since February, and remained at this level in the run-up to Christmas.

November’s half-year results showed an improved performance, with headline revenue up 3.9% to £771m, and a return to profitability. But the company also revealed that the planned funding partner for its national fibre network has withdrawn, slowing this project.

I suspect TalkTalk will find a solution to this problem, while continuing to improve the profitability of its core operations. But the group’s shares already trade at nearly 18 times 2019/20 forecast earnings and offer a dividend yield of just 2.6%. Given the company’s high debt levels, this doesn’t seem cheap enough to me. I’m going to continue avoiding this stock for a little longer yet.

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Roland Head owns shares of Royal Mail. 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.