An FTSE 100 share in the era of e-commerce
To me, it’s no surprise that Royal Mail (LSE: RMG) the share price has remained afloat in recent weeks. With many other UK stocks facing a big Omicron-related impact, Royal Mail could likely benefit from a worsening Covid-19 crisis.
Parcel traffic at the courier soared last year as closures pushed shoppers away from Main Street and onto their cellphones and laptops. So it’s no exaggeration to suggest that e-commerce sales could rise again as viral infection rates rise. Sales could increase even if new restrictions are not imposed, such is the extent of anxiety among buyers, as analysts at ParcelHero recently mentioned.
City analysts believe Royal Mail profits will rise 14% in this fiscal year (through March 2022). Although I think the projections could be improved depending on the state of public health emergency. Regardless of that, I would still buy shares in the delivery giant today as e-commerce looks set to continue to grow rapidly. Dropshipping company Oberlo estimates that 24.6% of all retail sales will be made online by 2025. That compares to an estimated 19.5% share for this outgoing year.
Current forecasts mean that the Royal Mail share price is commanding a forward price / earnings (P / E) ratio of just under 8 times. In addition, at current levels, the courier is showing a substantial dividend yield of 4.6%. This reading beats the wider 3.5% average of the FTSE 100 from a decent distance. Letter and parcel volumes at Royal Mail could suffer if the UK economy cools sharply. But I think the company still looks very attractive from a reward / risk perspective.
5% dividend yield
I am also thinking of adding national grid (LSE: NG) to my equity portfolio alongside Royal Mail. Indeed, its ultra-defensive operations (it has a monopoly on maintaining the British electricity grid) provide excellent peace of mind when it seems like the world is going to hell in a handcart. Its services will remain essential even if the Covid-19 crisis gets out of hand and the economy collapses.
Like any UK stock, of course, National Grid exposes its investors to certain risks. For example, maintaining the country’s network of pylons, substations and other equipment is expensive and undermines profits. These costs can also increase unexpectedly in extreme weather conditions. In addition, the threat that lawmakers could deprive National Grid of its role as the sole gatekeeper of the network is a pervasive risk facing its shareholders.
Yet at current prices, these are dangers that I am happy to accept. City brokers believe National Grid earnings will rise 17% in the fiscal year ending March 2022. That leaves the company trading on a forward price-to-earnings growth ratio (PEG) of only 0.6. A reminder that a reading below 1 suggests that a stock might be undervalued by the market.
This, combined with a 5% forward dividend yield, makes National Grid great value for money, in my opinion.
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