Two notable British names are set to be kicked out of the FTSE 100 in the latest quarterly index review. Marks & Spencer (LSE: MKS) and British Gas owner Centrica (LSE: CNA) will learn their fates when the results of the review are announced after the market closes next Wednesday.
According to my calculations, the two are currently the bottom-ranked FTSE 100 companies. They’re poised to be pushed out of the blue-chip index by FTSE 250 firms Polymetal International and Hikma Pharmaceuticals, which both occupy automatic promotion slots.
Do I think now is a good time to buy shares in any of the four companies?
No spark at Marks
Marks & Spencer has been in the FTSE 100 ever since the index was established in 1984. It narrowly escaped demotion at the last quarterly review, but I think it would take a miracle for it to dodge the bullet this time around.
The sinking value of the company, and the humiliation of its demise from blue-chip bellwether to just another mid-cap retailer, is symbolic of the troubles on the UK high street, but also testament to M&S’s repeated failures to successfully adapt its business over the last two decades.
It may have a single-digit P/E and high dividend yield, but the bottom line is this is a structurally challenged company in a structurally challenged sector. Is it a stock I need to own? No, has been my answer for a long, long time. And I continue to see it as one to avoid.
Mad cap
Arguably, Centrica, which also trades on a low P/E and high yield, is a similarly challenged company. However, it’s a utility, not a retailer, and while it has some similarities with M&S in the consumer-facing part of its business, the main challenges it faces are rather different.
Regulatory headwinds, notably a price cap on certain tariffs imposed on energy companies earlier this year, have had a damaging impact on profitability in the sector, and even on the viability of some companies. History suggests heavy-handed regulatory price caps, which produce market distortions and unintended disincentives, get discarded sooner or later. And for this reason, I wouldn’t entirely write Centrica off.
For sure, it faces a host of challenges, but I think the business can survive and recover when the madness and pernicious consequences of price caps become apparent, and policy is changed. Personally, I wouldn’t buy the stock today, but if I owned it I’d be inclined to continue to hold.
Two I’d buy
I named gold miner Polymetal as my top share for 2019 at the start of the year. Despite the strong rise that’s taken it to the brink of entry into the FTSE 100, I still see value in the stock and rate it a ‘buy’. It has a low double-digit P/E and forecast high-teens earnings growth, as well as a decent 4% dividend yield.
Generic medicines firm Hikma is more highly rated, on a high-teens P/E and with a sub-2% dividend yield. The company has yo-yoed in and out of the FTSE 100, but I think the long-term outlook for the business is so promising that it’ll become a fixture in the top index in due course. As such, I also rate this one a ‘buy’.
The index changes announced by the FTSE on Wednesday will take effect from Monday 23 September.