It might be the start of Advent next week, but the Christmas spirit could be lacking for Royal Mail Group PLC (LON:RMG), which is widely expected to get ejected from the FTSE 100 index once again following the latest quarterly indices reshuffle.
Christmas might be Royal Mail’s busiest time of the year, but a shock profit warning from its new chief executive Rico Back in October wiped out 20% of the postal firm’s market value, making the group a shoo-in for another demotion.
The stock only returned to the blue-chip fold in February this year, having spent six months among the mid-caps for the first time since its post-float elevation in 2013.
Royal Mail shares dropped below the 300p level for the first time after the October warning, taking a slump since it hit an all-time peak of 631p in May to 53% and putting well under the 2013 IPO price of 330p.
Since then, the firm’s shares have only just regained that IPO level, with the stock currently changing hands at 333.30p each.
Even after that recovery back to the float price, Royal Mail is still only the country’s 117th largest listed company by market capitalisation, and over £400mln from safety, according to interactive investor’s head of equity strategy, Lee Wild.
He said: “Even if we assume all other FTSE 100 constituents remain unchanged, it would currently require a 12% rally to guarantee Royal Mail’s survival in the top flight.
“Without a miracle in the coming days, Royal Mail will be deserving of its reputation as a yo-yo stock”.
Questions over 2013 IPO pricing
Meanwhile, Russ Mould, AJ Bell investment director’s commented: “A second relegation, coming shortly after a substantial profit warning, may lie to rest any further debate over whether the 2013 privatisation was correctly priced or not.”
He added: “A forecast annual dividend of 24.6p, enough for a yield of some 7.2%, maybe offering some support to the shares, but Royal Mail’s lack of earnings growth is working against it.
“Two acquisitions on the West Coast of America have yet to fully prove themselves, letter volumes in the UK are in decline and although e-commerce is driving parcel volumes this is a fiercely competitive market.”
Mould concluded: “A lot of the firm’s prior earnings improvements also rested upon cost-cutting but that can only take you so far and also represents relative low-quality profit improvement – firms that grow profits by expanding their top line (and do so organically) offer better quality profits and tend to be more highly prized as a result.”
Insurer Hiscox on pole as replacement
They also highlighted some other recent FTSE 100 entrants - Rightmove PLC (LON:RMV, Just Eat PLC (LON:JE.), and John Wood Group PLC (LON:WG.) – as being close to an almost instant relegation back to the FTSE 250 index.
Patience to pay for Woodford
Among those moving up to the mid-caps, Lee Wild thinks there could finally be good news for Neil Woodford too next week.
Since peaking soon after its launch in 2015, the high profile fund manager’s Woodford Patient Capital Trust PLC (LON:WPCT) has gone from a significant premium to net asset value to a large discount.
Wild noted that the trust’s promotion to the FTSE 250 in October 2018 lasted less than one week when index compilers FTSE Russell admitted a mistake - Civitas Social Housing PLC (LON:CSH), not the Woodford Trust, should have replaced NEX Group in the mid-cap index after it was bought by CME Group.
However, Woodford’s Trust has increased in value by more than a fifth since March and is currently on track to re-enter the FTSE 250 index next month, he added.