Russ Mould, investment director at AJ Bell, comments:
“It has been a relatively quiet year for the FTSE 100 index as a whole, amid historically low volatility, with these three changes taking the total for the year to just nine.
“For the year as a whole, the entry of Scottish Mortgage Investment Trust and Just Eat, for example, highlight investors’ ongoing hunger for growth stories. Halma’s promotion is a deserved reward for dependable earnings and dividend growth while the return of both Segro and Berkeley showed how commercial and residential property remain central to the UK’s economic fortunes.
“The relegation of Capita, Hikma, Dixons Carphone, ConvaTec, Merlin and Provident Financial shows how the market is in no mood to tolerate earnings disappointment.
Latest promotions to the FTSE 100
Just Eat
“Online food order and delivery service Just Eat’s arrival in the UK’s corporate elite is all the more remarkable as it was only floated in April 2014. The shares have stormed from a flotation price of 260p to north of 800p since then, to give the firm a market cap of £5.6 billion, bigger than each of Marks & Spencer, Sainsbury’s and Morrisons.
“This shows how the internet places a focus not just on price but on service and Just Eat’s success is testimony to its ability to harness the power of both technology and consumer satisfaction. The asset-light model relies on partners and word of mouth (customer reviews) as well as its scalable platform in a great example of how the internet can be used to create a powerful and profitable business model.
“Analysts expect the company to generate pre-tax profit of £137 million in 2017, up from £91 million in 2016. This is well below the £576 million, £549 million and £376 million expected of M&S, Sainsbury and Morrisons (on an adjusted basis) for their current financial years. They may be more profitable but Just Eat is valued more highly as the market takes the view it has the superior growth prospects – though with Deliveroo, UberEATS and Amazon Restaurants snapping at its heels, to name just three, Just Eat also operates in a fiercely competitive market place.”
DS Smith
“DS Smith has a substantial overseas presence that minimises the impact of Brexit and brings benefits in the form of a weak pound, while it can also point to a track record of consistent earnings and dividend growth.
“The company’s elevation to the big league follows that of packaging peer Smurfit Kappa in December, as both firms ride the online shopping boom and consolidation within the industry.
“DS Smith does not offer premium dividend yield relative to the FTSE 100, at 2.8%, but the company did unveil its ninth consecutive increase in its annual shareholder payout alongside its full-year results in June and history shows that those firms capable of consistently growing their dividend over time provide the best total returns to investors.”
Halma
“This month’s 7% increase in its first-half dividend also holds out the prospect of Halma embellishing its phenomenal record of increasing its annual pay-out by at least 5% for every year since 1980.
“Such consistency is evidence that the firm offers much that is ideal from an investment perspective: the mandatory nature of investment in its products, owing to health and safety regulations and concerns, creates consistent business flows and sticky customers, a combination which provides a degree of pricing power. That in turn can mean high margins, good returns on capital, strong free cash flow and that consistent dividend growth record.
“The only tricky issue as the company makes it to the top flight is the shares’ valuation. A multiple of 30 times forward earnings is twice that of the FTSE 100 and such a rating leaves no margin for error, either at company or a wider market level.”
Latest relegations from the FTSE 100
ConvaTec
“October’s profit warning came just a year after the company had listed in London and barely 10 months after its entry to the FTSE 100 last December. The catheter to colostomy bag to wound technology expert’s share price has never really recovered from that one-day plunge of more than 20% and it could take some time for it to recover the credibility that was lost.”
Merlin Entertainment
“Legoland operator Merlin has lost some of its magic this year and October’s profit warning pretty much sealed its fate so far as FTSE 100 membership was concerned as the shares joined the ‘down-10%-in-day’ club.
“The company had done well to bounce back from the hit to customer visits to Alton Towers after a terrible accident there in summer 2015 but a spate of terror attacks across several major cities, including London, has taken its toll and profits are now expected to drop slightly in 2017.”
Babcock International
“The management team at Babcock may feel a little miffed by the firm’s demotion as the company has not issued a profit warning and has a proud record of consecutive annual dividend increases that stretches back to 2003.
“However the shares have suffered a grinding fall as investors have become increasingly sceptical of the support services sector overall – after the profit alerts and share price plunges at Capita, Serco, Mitie, Carillion and others – and also wary of the possible impact of the Government’s austerity drive upon defence budgets.”
How promotion and relegation are assessed
All of the major FTSE indices are reviewed on a quarterly basis. They are set according to share prices from the close of business on the Tuesday before the first Friday of the review month (which in this case is December). The changes come into effect in mid to late December.
In general, a stock will be promoted into the FTSE100 at the quarterly review if it rises to 90th position, or above (by market capitalisation) and a stock will be demoted if it falls to 111th (by market value), providing it fulfils the other criteria, such as free float and a presence on the Main Market.