Royal Mail share price has dropped five per cent: Here’s why

Royal Mail’s share price dropped by five per cent this morning, after being downgraded by a major bank.

The stock dropped as low as 370p, from yesterday’s closing price of 389.7p, after Credit Suisse changed its rating on the beleaguered postal service company from neutral to underperform, with a target price of 325p.

“We expect worsening letter revenue trends and a costly labour deal to render 2018 earnings unsustainable,” said analysts at Credit Suisse.

The bank said there are two factors behind its dim outlook on letter revenues: the first being that RBS, Santander (c.30% of UK current account market) and the UK government are acting to cut mail volumes, and the second being that “internet use is rising fast among adults over 65, reducing the need for letters”.

The analysts added that labour negotiations are “a key pressure on the stock”, and said three per cent wage inflation is likely, based on their research.

The company has been grappling with unrest among its workers, and the prospect of strike action over the busy Christmas period is hanging heavy over the group.

A walkout planned for earlier this month was blocked by the High Court, however, the Communication Workers Union (CWU) said this mean the dispute was merely “postponed – not cancelled”. The union is striking over a raft of planned changes, including closing Royal Mail’s “gold-plated” final salary pension scheme and changing working practices in order to compete with next-day delivery firms like Amazon and Hermes.

Royal Mail’s chief executive Moya Green last week began holding talks with union bosses in an attempt to avoid a shutdown in the run up to Christmas. Professor Lynette Harris, a deputy chair of the government’s Central Arbitration Committee, has been appointed as mediator for the talks.

Over a fifth of Royal Mail’s market capitalisation has been wiped away in the last 12 months, culminating in an embarrassing demotion from the FTSE 100.