RM was undervalued – but the point to watch is a dividend

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Royal Mail was undervalued – but the point to watch is a dividend increase

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The firm could increase its dividend at a rate of about 25% a year for three years – so the payout could reach £400m by 2017

Royal Mail joined the stock market's list of elite companies after a privatisation that has seen its value soar by 80%. Photograph: Lewis

Welcome to the FTSE 100 index, Royal Mail. Shares in the privatised postal service may have fallen on their first day as a designated blue-chip stock, but the rise since flotation at 330p in mid-October is still 75%. Even the most belligerent investment banker ought to be able now to admit that Royal Mail was woefully underpriced at sale.

The key point, as mentioned here in recent weeks, is the dividend. The starting point was set at £200m, or 20p a share. But if, as many analysts think, Royal Mail is capable of advancing its dividend at a rate of about 25% a year for three years, the payout will reach £400m by 2017.

During the next year chief executive Moya Greene will be obliged to show her hand on the dividend. If she does indeed opt for an increase of 20%-plus, expect all the arguments to be reopened about an undervaluation at the expense of the public purse. Government ministers knew that Royal Mail, as a semi-utility, would be valued by investors as an income stock. But did they appreciate properly the company's potential to increase dividends?