“The FTSE 100 witnessed eight changes back in June after the last quarterly reshuffle in June, when Avast, GVC, Homeserve and Kingfisher replaced Carnival, Centrica, easyJet and Meggitt, and there could be more drama this time around, especially as ITV looks certain to lose its place in elite index and British Land grip membership is looking wobbly,” says Russ Mould, AJ Bell Investment Director.
“B&M European Value Retail looks best placed to vault into the FTSE 100, as its market cap is currently high enough to rank above the 90th position that merits automatic promotion. This would be B&M European Value Retail’s first time in the FTSE 100 and promotion would come just over six years after the company’s flotation at 270p a share.
“Elevation for the retailer would offset ITV’s automatic demotion. The broadcaster’s £2.5 billion market cap leaves it ranked around 140th and with little chance of survival this time around.
“Meanwhile, British Land is teetering on the brink. Its market cap of £3.3 billion leaves the Real Estate Investment Trust ranked right on the cut-off point of 110th. Any further slippage could open the door to a FTSE 250 firm and a number of companies are jockeying for position.
“They include former FTSE 100 members Direct Line, ConvaTec, Weir and Foreign & Colonial Investment Trust, who were last relegated in September 2019, December 2017, September 2015 and September 2009 respectively.
“Potential debutants include student housing provider UNITE, Bill Ackman-led investment vehicle Pershing Square, precision instruments specialist Renishaw and Dechra Pharmaceuticals.
Possible FTSE 100 promotions in September 2020
• B&M European Value Retail floated in 2014 at 270p and the shares have subsequently risen by some 80%. The retailer’s value proposition had already chimed with the times during the era of austerity and it has continued to add customers in 2020 across its estate of more than 650 B&M-branded stores as the UK tipped into recession. July’s trading update for the fiscal first quarter (April-June) read well as B&M revealed 27% like-for-like revenue growth in the UK and total group sales growth of 28%. An experiment to expand in Germany did not go well and that business has been sold but trading at the French operation, Babou, has bounced back strongly in the early stages after lockdown and the UK convenience store proposition, Heron Foods, built on last year’s strong momentum. The company’s format looks ideally suited to the current environment – value-oriented and generally situated in larger, out-of-town sites where it is easier for shoppers to socially distance. B&M increased its dividend last year and also paid a 15p-a-share special dividend back in March.
• Direct Line is the next biggest FTSE 250 stock at the time of writing. The insurer first made it into the FTSE 100 in autumn 2014, just two years after it had been spun out of NatWest Group (or Royal Bank of Scotland, as it was then). It stayed there until September 2019, when investors’ concerns over claims inflation and increased car repair costs, the Government’s latest intervention in the Ogden rate (set at minus 0.25% by the Lord Chancellor in July) and the threat of regulatory intervention on pricing all took their toll on the share price.
However, the shares are higher now than they were a year ago, helped in no small part by this month’s decision to reinstate special dividend payments after their cancellation in spring. This year’s first-half results were solid, too, as the impact of COVID-19 was minimal. Higher travel and business interruption claims were offset by lower motor and commercial claims as lockdown cleared the roads and emptied shops.
Nor is Direct Line, best known for its Direct Line and Churchill brands, one of the firms involved in the legal test case on (unpaid) business interruption claims brought by the Financial Conduct Authority. The FCA probe into renewal pricing, whereby the regulator is concerned about how new customers are charged less than existing ones, is still ongoing and must be watched although it is being delayed by the pandemic.
If Direct Line does make it back in to the index it will be the eighth member of the FTSE 100 to currently have a female boss. CEO Penny James took over from Paul Geddes in June 2019.
• Then come a number of companies whose market caps is very similar and a move of a percentage point or two on deadline day could make all the difference, although they will probably need a sharp drop in the value of International Consolidated Airlines to have any chance of reaching the FTSE 100. Other potential promotion candidates include former index members Convatec, Weir and Foreign & Colonial Investment Trust, as well as potential newcomers UNITE, Pershing Square, Renishaw and Dechra Pharmaceuticals.
Possible FTSE 100 demotions in September 2020
• ITV’s current spell in the FTSE 100 dates back to March 2011 and the broadcaster’s imminent relegation would represent its second demotion since the company’s creation in its current form in 2004, when Granada took over Carlton Communications. Its last spell in the FTSE 250 began in September 2008 as the Great Financial Crisis reached its height and the UK economy started to tank, taking advertising spending with it. ITV’s demotion this time will owe something to a similar situation, as the COVID-19 pandemic limits the company’s ability to create and show new content and thus attract advertising, although the longer-term trend of competition from streaming services and rival broadcast technologies is a huge factor as well. ITV is looking to adapt to new consumer habits, with ITV Hub and Britbox, but this year’s first-half figures made for grim reading, as broadcast revenues fell 21%, stated earnings per share fell 90% and the interim dividend was cancelled.
• British Land is another firm where long-term trends (in this case the challenge posed to bricks-and-mortar retailers by online rivals) are being exacerbated by the pandemic and the economic fall-out, with the possibility of reduced demand for office space a further complication for the commercial property landlord. British Land’s stint in the FTSE 100 dates back to September 2001 and although demotion is by no means certain it could be a close run thing. Shares in the Real Estate Investment Trust (REIT) are down by around a quarter over the past 12 months, by 60% from their 2015 high and by 75% from their all-time peak of 2007. The REIT has skipped its past two quarterly dividends and seen its net asset value per share drop from 967p in March 2018 to 774p in March 2020. June’s update revealed that 88% of rent due from offices had been collected in the April-June quarter but just 36% of retail tenants had paid on time. The shares trade at a 55% discount to NAV, which is investors’ way of saying they think there is more bad news to come on both property values and rental income.
Appendix: 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 (in this case Tuesday 1 September). The changes will be announced after the close on Wednesday 2 September and come into effect as of the market opening on Monday 21 September.
• 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.
