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Should you buy Royal Mail Shares after strong results?

Royal Mail share price last month jumped more than 13% last month.

Royal Mail PLC (LON: RMG) share price last month jumped more than 13% a few days after announcing its fiscal year 2020/2021 results. The price remained relatively flat since 27th May, losing just 1%.

The postal and courier services provider share price is up more than 70% this year and a whopping 230% over the last 12 months.

Royal Mail shares trade at an attractive price-earnings ratio of 9.54 despite the current bull-run.

The company also declared a final dividend of 10p payable on 28th July. It also announced a semi-annual dividend of 10p, implying a full-year 2021/2022 dividend of 20p. RMG shares traded at a forward dividend yield of about 3.40% on Wednesday.

Can Royal Mail share price keep rising in the next six months?

The second half of the year could witness a slower price growth because the London-based company is already outperforming its benchmarks.

The FTSE 100 index is up about 9% this year and 15% in the last 12 months. The FTSE 350 index has also returned just over 9% to investors this year and slightly below 18% over the last 12 months.

Therefore, it is possible that the RMG share price could rise at a slower rate in the foreseeable future.

However, shareholders could also be looking at Royal Mail’s current valuation and upcoming dividend payments.

Royal Mail posted strong results in the fiscal year ended 28th March 2021. Revenue for the years increased 16.6% from the fiscal year 2019/2020, whereas basic EPS skyrocketed to 62.0p, up from 16.1p in the previous year.

Investors will expect revenue and earnings to grow further in the coming year. The re-opening of the UK economy will restore the general business activity, in turn boosting the demand for parcel and mail services.

Are expectations already priced into the RMG share price?

One could argue that investors have already factored Royal Mail’s expected revenue and earnings growth for the next year in the share price.

Looking at the company’s average P/E ratio for the last five years, which YCharts estimates at about 31.38, it would be easy to throw a rebuttal against this argument. However, by removing the 6-month period starting in October last year and ending in March this year (when the P/E ratio ranged from 109 to 262), then the average for the remainder of the 5-year period is about 10.00. This leaves little room for the share price to continue upwards at the current valuation of 9.54 P/E.

From this perspective, investors looking at the stock less optimistically will be reasonably on the safe side compared to those expecting the share price to rise 200% again in the next 12 months.

The bottom line

Royal Mail share price has soared significantly this year and in the last 12 months. The company’s fundamentals look strong after impressive full-year results.

Although there could be significant revenue and earnings growth in the next year, investors may already be factoring in those expectations in the current RMG share price.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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