Flying Royal Mail plc set for FTSE 100 re-entry

Royal Mail plc (LON:RMG) will return to the FTSE 100 (INDEXFTSE:UKX) in a busy first index reshuffle of 2018.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of Royal Mail (LSE: RMG) have been on a tear in recent months and the company is set for promotion to the FTSE 100 in the first index reshuffle of 2018. Property group Hammerson will drop out of the top tier.

Meanwhile, a whole host of firms — including some notable names — are set to be booted out of the FTSE 250 index, with some fast-growing small-caps you may not have heard of moving up to mid-cap status. More on these shortly, but first the reshuffle at the top table.

Hammered

I wrote about Hammerson’s troubles earlier this week. In brief, the company’s looking to acquire heavily indebted FTSE 250 firm Intu Properties in a £3.4bn all-share deal. Hammerson’s shares have fallen over 15% since the announcement, taking its market capitalisation below the threshold for automatic ejection from the FTSE 100.

Red letter day

Royal Mail, which suffered the same fate in last September’s reshuffle, began to bounce back strongly later in the year. Its shares have soared by more than 50% — from 370p at the start of November to 564p at yesterday’s market close. Its £5.6bn market-cap puts it comfortably above the threshold for automatic promotion to the FTSE 100.

The strong rise in Royal Mail’s shares has come on the back of healthy trading updates and the reaching of an agreement with the Communication Workers Union. City analysts expect the company to post earnings per share (EPS) of 41.8p for its financial year to 31 March and a dividend of 24p. This gives a price-to-earnings (P/E) ratio of 13.5 and a dividend yield of 4.3%. Not unattractive, but the trade-off is forecasts of only anaemic earnings and dividend growth. That’s because letters are in structural decline and while parcels are a growing, they’re in a highly competitive market.

Breakdowns and funerals

According to my sums, as many as seven companies are set to be kicked out of the FTSE 250. These include roadside recovery group AA and funerals firm Dignity.

Neil Woodford isn’t the only investor who will be ruing the day he backed AA’s stock market flotation in 2014 at 250p a share. The debt-laden firm, which recently slashed its dividend, is currently trading at 79p. Dignity’s shares have more than halved in value since it issued a massive profits warning in January. It was obliged to reset its funeral prices, having discovered that regularly hiking them in a competitive market was unsustainable.

The sun has got his hat on…

One of the most interesting small-caps set for promotion to the FTSE 250 is On the Beach (LSE: OTB). This online specialist in short-haul holidays was floated at 184p a share in 2015. The shares are currently trading at 579p, valuing the business at over £750m.

Despite the stunning rise in the price, the company — which issued a trading update full of encouraging news earlier this month — still looks good value to my eye. City analysts are forecasting a 25% increase in EPS to 22p for its current financial year (ending 30 September), giving a P/E of a bit above 26. High annual EPS growth is forecast to continue in subsequent years, rapidly reducing the P/E and making the stock very buyable in my book.

All the changes to the indexes, which the FTSE committee will announce later today, will take effect from the start of trading on Monday 19 March.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »