Last week, it was confirmed Marks & Spencer (LSE: MKS) would be leaving the FTSE 100, marking a turning point for the retail giant.
It’s been a mainstay of the UK’s leading blue-chip stock index since the Footsie’s founding in 1984. But now its dwindling market-cap means the business will be relegated to the FTSE 250.
This might seem like bad news at first sight, but I don’t think investors should give up on the M&S share price just yet. Indeed, there’s a good chance this relegation could be just what Marks needs.
A growth index
FTSE 250 businesses have a better record of growth than their FTSE 100 counterparts. There are a handful of reasons why this is the case. They’re smaller, more nimble and retain more income to reinvest, rather than paying out hefty dividends.
I’m not saying that M&S will become a growth stock overnight. But by moving to the lower index, there could be less pressure on the firm to perform. That might give management more room to develop the business the way it wants, rather than the way the City wants.
The consensus among consumers seems to be that the retailer needs to go back to its roots if it wants to return to growth. Shoppers want better quality clothing, a better range of products and lower prices. This means the firm needs to slim down, re-focus and give customers what they want, not what management thinks they want.
There seems to be some progress on this front. Marks is in the process of closing more than 100 stores and is cutting the numbers of managers to improve efficiency. Meanwhile, the food business is starting to take market share after prices were reduced, and confusing promotions eliminated.
I think the business is going to have to make a lot of hard choices if it wants to return to growth. But, to reiterate, being in the FTSE 250 might give it the freedom to do just that without the harsh lights of the City always focused on the business.
Currently, analysts are expecting a decline in earnings of 37% this fiscal year. Even after factoring in this decline, the stock is trading at a forward P/E of 10. This multiple doesn’t seem too demanding if the business does manage to reignite growth over the next year or two.
On top of this, the stock supports a dividend yield of 5.6%. With the payout covered 1.8 times by earnings per share, even after this year’s decline in profits, I think it looks safe for the time being.
So, it looks as if investors will be paid to wait for the turnaround. Debt has fallen in recent years, which would also give the company flexibility to maintain the dividend and pursue its turnaround strategy without having to worry about a cash crunch.
All in all, while M&S does seem to have made plenty of mistakes in the past, its relegation to the FTSE 250 could mark a turning point for business, in my opinion.
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Rupert Hargreaves owns no share 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.