Royal Mail is currently booked for automatic demotion to the FTSE 250 on the basis of its market capitalisation, just nine months after its return to the FTSE 100, when the letters-to-parcels group replaced real estate investment trust Hammerson – according to AJ Bell.
This would represent Royal Mail’s second demotion. It first entered the FTSE 100 in December 2013, shortly after its controversial flotation, and dropped out in September 2017. 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. Although the shares initially soared from 330p and only peaked at 631p this spring but after the latest profit setback, under new boss Rico Back, they are struggling to hold onto the 330p level.
A forecast annual dividend of 24.6p, enough for a yield of some 7.2%, may be 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.
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.
“We have already had one change to the FTSE 100 during the final three months of the year, since oil services and equipment specialist Wood re-entered the index following Comcast’s successful bid for Sky and it looks like we might get at least one more after the final FTSE 100 reshuffle of the year on 4 December,” says Russ Mould, AJ Bell investment director.
“Royal Mail’s £3.4 billion valuation leaves it ranked 115th in the market capitalisation rankings and below the 111th spot which means automatic relegation to the FTSE 250.”