The controversy surrounding the bargain basement flotation of Royal Mail (LSE: RMG) has temporarily died down, but its shares continue to trade 78% above its initial offering price. What’s more, recent news suggests to me that Royal Mail could still offer further upside to investors, especially in the dividend department.
Here’s a review of three major developments that I think could trigger further gains for Royal Mail shareholders.
1. Cashing in on housing
When the Royal Mail share prospectus was published last year, sharp-eyed investors immediately realised that three of the Mail’s prime London properties appeared to have been missed out of the valuation model.
It now turns out that last year, Royal Mail submitted a planning application for its Mount Pleasant sorting office site to Islington and Camden councils.
The plans, for around 700 high-rise flats, have been widely criticised, and were expected to be refused by the two councils’ planning committees — until London Mayor Boris Johnson exercised his right to ‘call in’ the application in January, and authorised it himself.
The flats are expected to sell for around £4bn, netting Royal Mail a healthy profit — with two more development sites still to sell…
2. 20% dividend growth?
Royal Mail is expected to pay a dividend of 16.4p for 2013/14, calculated on a pro-rata basis from an initial dividend of 20p.
However, Royal Mail is expected to be able to grow its dividend by around 20% per year over the next few years. Consensus forecasts suggest that next year’s payout could be 23.7p — a whopping 23% increase on this year’s 20p level.
Royal Mail’s free cash flow per share was 33p in 2012/13, so a 23p payout doesn’t seem too much of a stretch.
3. An end to strikes?
Few UK businesses have endured as many strikes as Royal Mail, over the last few years.
The likelihood of future strikes was a source of anxiety to shareholders, but yesterday’s news of a major new deal with the Communication Workers Union (CWU) seems to have cut this risk dramatically.
Royal Mail and the CWU have agreed a long-term framework for pay growth, strengthened employment terms and a more modern approach to dispute resolution.
It’s too early to say whether postal strikes will become a thing of the past, but yesterday’s deal looks very promising indeed, and should help Royal Mail complete its modernisation plans.