Image Alt

The Investing Box

  /  Editor's Pick   /  Can Royal Mail shares beat the market again in 2022?

Can Royal Mail shares beat the market again in 2022?

A graph made of neon tubes in a room

Royal Mail (LSE: RMG) shares had a smashing 2021. The stock has returned 54% over the past 12 months, buoyed by rising profits. Compared to a return of just 15% for the FTSE All-Share Index over the same period. Both of these figures include dividends paid to investors. 

The question is, was this performance just a one-off, or will the stock continue to beat the market in 2022?

The outlook for Royal Mail shares

Of course, it is impossible to predict how a stock will perform over the next 12 months with a high level of accuracy. But I can estimate a stock’s potential by looking at growth estimates.

In theory, a share price should match the underlying fundamental performance of the business. Therefore, if profits continue to grow next year, Royal Mail shares should follow suit. There is no guarantee this will occur. 

Looking out over the next year, City analysts expect the group to report earnings growth of around 8% for 2022. That is not particularly exciting. However, the company’s valuation does leave a lot of room for expansion. 

The shares are currently selling at a forward price-to-earnings (P/E) multiple of 8. The market average is around 14. So it does look to me as if there is room for the group’s valuation to expand in the year ahead. Analysts have also pencilled in a dividend yield of 4.7%. 

The company’s growth and dividend figures suggest the stock could produce a return of around 10% next year. That is assuming the valuation remains the same. Returns could be significantly higher if the valuation increases to around the market average. 

Still, this does not guarantee the company will outperform the rest of the market. These figures only suggest Royal Mail shares will produce a positive return next year. 

Growth headwinds 

The company could face multiple challenges next year, which will hold back growth. These include wage inflation and increased competition from smaller peers, who can pick and choose their markets. This could rob the enterprise of valuable income in some of its most profitable areas. 

The corporation has been trying to overcome these challenges by investing more in technology. The strategy seems to be yielding results, although additional capital spending will have an impact on profit growth. The greater the competition, the more the business will have to spend to stay ahead, and the bigger the impact this will have on its bottom line. 

These are the challenges I will be keeping in mind for the year ahead. Nevertheless, despite the above headwinds, I think the outlook for Royal Mail shares in 2022 is encouraging. And I think its valuation does not give the company enough credit for its potential. 

As such, I would be happy to add the stock to my portfolio today as an undervalued income and growth investment. 

The post Can Royal Mail shares beat the market again in 2022? appeared first on The Motley Fool UK.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

More reading

Rupert Hargreaves 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.