M&S Set for First Ever FTSE Relegation

The latest FTSE 100 reshuffle could see high street stalwart M&S and energy giant Centrica ousted from the top flight

Holly Black 23 August, 2019 | 10:15AM
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Marks & Spencer looks set to be relegated from the FTSE 100 in the September reshuffle, for the first time in the history of the index. 

The high street stalwart has held its place in the UK stock market’s upper echelons since the FTSE was launched in 1984. 

But every three months the index, which is comprised of the largest 100 UK-listed companies by their market capitalisation, has a reshuffle. Those companies whose market cap is ranked 90th or higher are promoted into the top flight, while those whose worth have fallen to 110th or lower are relegated. This is to ensure a company does not edge into a promotion or relegation beause it has had a particularly good or bad day on the market. 

This Isn't Just Any Reshuffle ...

Founded in 1884, M&S (MKS) was the first British business to post pre-tax profits of £1 billion. But its ousting from the FTSE is yet another sign of the travails of the UK high street. M&S has narrowly dodged ejection from the index in recent reshuffles, avoiding relegation three months ago with a well-timed rights issue. 

Helah Miah, investment research analyst at The Share Centre, says: "Alas, it can only hold out for so long and this time there seems little that can save it from going down barring a spectacular recovery in the share price.” Currently shares are trading at 189p, down from 292p a year ago.

M&S has suffered in recent years with poor choices in its clothing lines and while its popular food business has thrived, a new chief executive has failed to deliver the promised overhaul of the fashion side of the business. Miah adds: “The group has also been too slow to adapt to online retail and has been left behind by rivals who offer a more compelling online service.” 

Morningstar analysts give M&S a high uncertainty rating, which may come as no surprise given the uncertain outlook for the retail sector. The firm also has no Economic Moat, indicating no barriers to entry from competition.

Morningstar analyst Ioannis Pontikis says: “In a fiercely competitive retail marketplace, Marks & Spencer’s underperformance is yet another sign of the difficult in developing competitive advantages in the retail sector, leaving it exposed to disruption from new players such as price-led discounters and online retailers.” He adds that a transformation plan for the business implemented in 2016 has yet to yield any tangible results. 

Centrica Could be Out

British Gas-owner Centrica (CNA) is another contender for relegation. Only a month ago the firm’s share price plunged after it reported a £446 million loss, slashed its final dividend and announced the departure of its chief executive. Indeed, shares are currently trading at 65.8p, less than half their price of 143.7p a year ago. 

A rise in customers switching energy providers and the introduction of a tariff cap has hurt legacy businesses such as Centrica, as cheaper upstarts lure households over to their services. The ailing state of the business affects thousands of shareholders who may have been holding the shares since the privatisation of British Gas in the 1980s. 

Morningstar analyst Tancrede Fulop says that while 2019 is likely to be the trough for earnings after a five-year slide, many of the new parts of the business (those linked to digitalisation and efficiency, for example) are still loss-making and profitability is unlikely to fully recover. The stock has a high uncertainty rating and no Economic Moat. Fulop adds: “We are unconvinced by the group’s strategy. Its only advantage is to make Centrica a suitable prey for a oil major seeking to diversify into retail energy.” 

ftse reshuffle

In line for a promotion, meanwhile, are precious metal miner Polymetal, pharma group Hikma and engineering business Meggitt. Miah says: “It is interesting to see a clear distinction between those on the way up and those heading down. It is highly reflective of the current economic and political environment – out go the UK-focused businesses, while those with a more global exposure look to replace them.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk