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The promotions and demotions of the FTSE 100 and 250 – what it means for investors

We look at how some recently promoted and demoted companies are getting on.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The so-called ‘FTSE reshuffle’ is when listed companies can find themselves promoted into, or demoted out of, the indices of the UK’s biggest companies.

This is important as being included in the FTSE 100 or FTSE 250 can have its benefits – together these are the 350 largest companies in the UK. Companies in these indices are more likely to be bought by funds aiming to replicate the wider index. From a PR and visibility perspective, being known as one of the biggest is no bad thing either.

But just because a company has made it to the FTSE 250 list, been kicked out of it, or relegated to it from the FTSE 100 doesn’t mean its outlook is purely positive or negative. It’s still important to do your research and regularly review your investments rather than take action just because of the hype surrounding the reshuffle.

With that in mind, we wanted to take a closer look at some of the companies that found themselves demoted at the end of last year.

This article is not personal advice, if you’re unsure whether an investment is right for you, seek advice. All investments can fall as well as rise in value, so you could make a loss.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Who fell out the FTSE 100?

Johnson Matthey (JMAT) made an appearance in the FTSE 250 after being booted out the FTSE 100. JMAT’s the leading manufacturer of catalytic converters – the clever bits in car exhausts that strip out the worst emissions. A sizeable business recycling old automotive catalysts too means overall, its main exposure is to the traditional car industry.

This causes some headaches as the electric vehicle revolution gathers pace, because electric cars make JMAT’s core product obsolete. In response, the group planned to beef out its own battery material business, which made sense to us. But in early November, news broke that Johnson Matthey was planning to exit battery materials all together. The wider market had become too competitive, and JMAT felt it couldn’t justify the level of spending needed to bring the division up to speed.

This was disappointing, and the market’s reaction was a contributing factor to JMAT falling out of the FTSE 100. Together with the sale of the Health business, it’s now more reliant than ever on traditional car manufacturing.

However, it’s not all doom and gloom. Analysts currently expect at least the next three full year results to show operating profit growth of about 5-7% a pop.

That’s because traditional cars aren’t going to go out of fashion overnight, and the core catalyst business is still very much the main story. In fact, it’s very cash generative. Johnson Matthey generated free cash flow of £271m last year, and that’s expected to be hovering around £200m in 2023.

That helps underpin a prospective yield of 4.2%. Remember though, yields are variable and not a reliable indicator of future income. No dividend is ever guaranteed.

With all this in mind, the recent knock to the group’s price to earnings ratio suggests the market’s aware of these external risks. Long-term success rests on JMAT’s ability to align itself with the green energy revolution and there are no guarantees.

View the latest Johnson Matthey share price and how to deal

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Who fell out the FTSE 250?

As a lot of you will already know, AO World sells everything from washing machines to laptops. And the results released at the end of November highlighted a number of challenges. Cash profits (EBITDA) expectations for 2022 were trimmed by 65%.

That’s because AO World has invested heavily in new infrastructure to support increased demand from the pandemic. The problem is, revenue is no longer expected to gather pace at the expected rate, meaning margins are suffering. It seems the group over-egged its expectations. Competition in this space is fierce, with price being a key factor in where customers ultimately decide to buy their new fridge.

There are brighter spots in the form of the group’s £66m in available cash, so we don’t have immediate concerns over liquidity. Ultimately, AO World is operating in a tough space and the market will need some convincing before the group could be promoted back into the FTSE 250. Although we’re mindful that the bar to beat is now very low, and while challenges do remain, we’ll be watching for the next outlook statement very closely.

View the latest AO World share price and how to deal

Perhaps unsurprisingly, Restaurant Group also dropped out the FTSE 250. The Wagamama and Frankie & Benny’s owner is in exactly the wrong market for changing behaviours from the pandemic. Shopping centres and town centres lend themselves to quick-food chains. Sadly very few were shopping or popping out from the office for a bite to eat in the last couple of years.

That fed into a huge operating profit decline from a £91m gain, to a loss of £50m in 2020. And Covid-19 simply added to a list of challenges that already existed for the group, including the fact declining high street footfall has been around for years.

Restaurant Group’s strong brands means it’s more defensive than some others. Once town centres start to pick up again, in theory, the group should benefit from that.

The other thing to keep in mind is inflation – a measure of how much prices have gone up over time. It’s the rate cash becomes less valuable – £1 this year will get you further than £1 next year.

As discretionary spending comes under fire, Restaurant Group’s mid-market and convenience-centred offering is more protected than high-end options. That said, if discretionary spending takes more of a hammer blow than expected, all eating out venues are likely to feel the pinch.

Restaurant Group dropping out the FTSE 250 didn’t make any of these challenges more real. It’s still the same company it was this time last year.

View the latest Restaurant Group share price and how to deal

So, what does this mean?

Falling out the FTSE 350, that’s the FTSE 100 + FTSE 250, gets a lot of attention. The media in particular likes to draw attention to these stocks for the wrong reasons.

If you hold a company that has been booted out, you should rightfully be asking why. But chances are, the FTSE reshuffle highlighted existing operational challenges. It doesn’t create new ones. So, if a company you hold falls out the FTSE 100 or 250, it definitely doesn’t warrant any panicked decisions. But it’s worth reviewing and understanding why it’s happened.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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