Pennon primed for the drop from the FTSE 100 after latest reshuffle

“The latest FTSE 100 reshuffle, the results of which are due to be announced after the close on Wednesday 3 March, could be relatively quiet this time around, with just one demotion and one promotion. Pennon and Weir are the two firms that look most likely to swap places, although grocer Morrison could also head out of the UK’s premier index, opening the way for a FTSE 100 debut for specialist distributor Electrocomponents,” says Russ Mould, AJ Bell Investment Director. “Much will depend upon the next few days’ trading but it is noticeable how firms whose business models were initially hit hard by the pandemic, such as Weir, Howden Joinery and ITV are inching their way back up the ranks, as measured by market capitalisation, while those who were seen as relatively unaffected or even beneficiaries of lockdowns, such as Pennon and Morrison are sliding down. 

“This does suggest that investors are currently looking for recovery plays and moving away from perceived havens, in the view that the UK’s leading vaccination programme, added to a Brexit deal and ongoing stimulus from both Government and the Bank of England, mean better times lie ahead for the economy, and therefore corporate profits and cash flows.

“This can also be seen in which sectors within the FTSE 350 have done best not just since Pfizer Monday (9 November 2020), when investors were given real hope that a solution to the COVID-19 crisis could be at hand, but even over the last 12 months as a whole. Hope does seem to have replaced fear. This is all well and good so long as it does not then turn to greed, as that is when investors begin to get over-confident and take on too much risk – and too much risk usually leads to accidents and trouble in the end.

Source: Refinitiv data

Possible demotion candidates

•    At the moment, only Pennon looks set for the drop into the FTSE 250. Its £3.7 billion market cap leaves the water utility ranked 117th within the FTSE 350, below the safety mark of 110th. Pennon has done little wrong since its first-ever promotion to the FTSE 100 in March 2020, when it rode both a dash for defensive safety and relief that Jeremy Corbyn had not won the December 2019 General Election. However, some shareholders may have been disappointed by the absence of any cash returns, thus far, in the wake of the £3.7 billion sale of the Viridor waste management operation.

•    The other FTSE 100 firm to be flirting with relegation from the FTSE 100 is grocer Morrisons. This may seem like rank ingratitude given the role that the company has played in keeping the nation fed and watered during a pandemic and multiple lockdowns. In addition, Morrisons posted a strong Christmas trading update in January, when the Bradford firm both retained its earnings guidance for the fiscal year to the end of January and reinstated a postponed 4p-per-share special dividend payment. However, Morrisons has perhaps not been able to make quite as much hay as shareholders had hoped during the pandemic. The January update acknowledged that COVID-related costs would come in at £280 million, some £10 million above prior estimates, while the company also noted that it would repay £274 million in business rates relief, including £230 million in the financial year just ended. Morrisons’ £4.1 billion market cap ranks it 110th, just one place above automatic demotion. If it were to fall through the trap door, that would be Morrisons’ first relegation since December 2015, and then it bounced back at the very next reshuffle in March 2016. Prior to that the grocer had been ever-present in the index since its debut in 2001.

Possible promotion candidates

•    There are no FTSE 250 firms with a market cap sufficient to merit a ranking of 90th or higher and thus automatic promotion. 

•    If Pennon is demoted, that would open the way for a return to the FTSE 100 for Weir, whose market cap ranks its 95th. The irony here is that Weir’s return to the big league would owe much to a decision to slim the company down, through the sale of its Oil & Gas operations to America’s Caterpillar, and decision to focus on mining equipment. Weir had already sold its Flow Control unit and acquired ESCO as part of this plan.

•    If Morrisons loses ground at just the wrong moment and also exits the FTSE 250 that could vault industrial and electronic components distributor Electrocomponents into the FTSE 100 for the very first time, with a £4.6 billion market cap. The company’s shares trade only a fraction below their all-time high after its reintroduction of dividends alongside its first-half results in November, when the firm showed how effectively it had developed multiple routes to market around the globe – digital accounted for nearly two-thirds of sales in the first six months of its current financial year.

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 2 March). The changes will be announced after the close on Wednesday 3 March and come into effect as of the market opening on Monday 22 March.

•    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.