I think Royal Mail (LSE: RMG) shares are one of the most overlooked investments on the London market today. Considering the company’s potential, I would be happy to invest £2,000 in the business right now to hold as an investment for the next five to 10 years.
Growth catalysts
I believe two main growth catalysts will drive the company forward over the next decade or so. The first is the ever-increasing demand for parcel delivery across the UK.
Royal Mail has been rising to the challenge in recent years. It has launched a new parcel pickup service and is investing hundreds of millions of pounds in automated parcel sorting machines.
These initiatives should help the organisation capitalise on the booming e-commerce sector and the resulting growth in parcel delivery volumes.
For years the company has been trying to offset declining letter volumes in its core business, and it now looks as if rising parcel volumes will offset this headwind.
That is the first primary catalyst I believe will drive the firm forward over the next ten years.
The second catalyst is the company’s expansion of its international business. I have long believed that ignoring this division was a significant mistake.
In the UK, Royal Mail has to deliver a certain level of service to every household. But overseas, the group can pick and choose the markets in which it wants to operate. It can bring its experience working in the UK to overseas businesses and use the cash generated to help grow the international division and provide financing for the company here at home.
Management finally seems to be taking action on this front. The company recently laid out its ambitious growth plans for the international business over the next five years. These plans could include additional acquisitions and expansion into new markets.
Headwinds for Royal Mail shares
Of course, by expanding into new markets, the company may encounter new competitors. This is probably the most significant challenge it may have to overcome during the next couple of years.
Fighting off new competitors and investing in new machinery will impact its bottom line. If costs grow significantly, I will have to re-evaluate my opinion on Royal Mail shares.
Despite these possible challenges, the investment offers significant potential over the next decade.
As well as the growth tailwinds outlined above, I think the business can also become an attractive income investment. According to current analysts’ projections, the shares will yield 6.4% for 2022. That looks extremely attractive in the current interest rate environment.
The stock is also trading at a forward price-to-earnings (P/E) multiple of 6.8. This looks dirt cheap, and the valuation is close to the stock’s dividend yield, an incredibly rare phenomenon.
Historically, Royal Mail shares have commanded a P/E multiple of around 10. The stock could increase by 47% from current levels if it returns to this multiple.
Considering this income and growth potential, I would invest £2,000 in the company today.
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.
