M&S on brink of FTSE 100 return as revival continues

A “fundamentally changed” Marks & Spencer Group (LSE:MKS) has been backed to reclaim blue-chip status after several City firms unveiled new and improved price targets today.

The shares reached lunchtime at 230.5p for a market value of around £4.5 billion after yesterday’s upgrade to profits guidance boosted confidence in turnaround progress.

Barclays believes the FTSE 250 stock has the potential to reach 270p, while Credit Suisse and Deutsche Bank raised their estimates to 260p following the trading update.

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At such levels, M&S would be large enough to win back its place in the FTSE 100 index after a four-year absence. The next reshuffle takes place in September, with the resurgent retailer in the frame for promotion as one of the three largest stocks in the FTSE 250.

The shares are up more than 80% this year to where they were in January 2022, although M&S loyalists among the 100,000-strong band of retail investors will recall being above 500p in 2015 and sharing a dividend pot worth £375 million the following year.

In contrast to 2016’s total dividend of 18.7p and a special award of 4.6p, distributions have been at zero since the start of the pandemic.

However, an improved operating performance and strengthened balance sheet mean the group is planning a modest annual dividend starting with November’s interim results.

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Deutsche Bank sees the potential for 6p a share to be paid across the 2023/24 financial year, rising to 7.74p the following year and 9.56p the year after. However it notes that the remainder of the Ocado Retail joint venture buyout is likely to be due by 2026 and presents competition for future payments.

In the wake of yesterday’s trading update, the bank upped its 2023/24 profits forecast by 18% to £575 million based on expectations for the half-year figure to be £278 million compared with £206 million the year before. The 2025 haul is seen 13% higher at £649 million.

Retail analyst Adam Cochrane said: “We have been supportive of the M&S turnaround and view this as more evidence that investors should look at M&S again – with a fresh pair of eyes, as the business has fundamentally changed.”

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He said food like-for-like sales growth of 11% in the 19 weeks to 12 August showed the work that M&S has done to improve pricing as well as store standards. Offsetting the risk of trading down in the current climate, he believes M&S should benefit as consumers choose to eat in rather than dining out.

In clothing, Cochrane said a 6% improvement in recent like-for-like sales was even more impressive after a better full price sell through.

He believes that M&S has finally found a store model that works for both clothing and food, with recent estate changes able to deliver better sales and profit densities. “As we see more new and refurbished stores in the mix, we expect the drag from the tail to be reduced and like-for-like sales should improve further.”

Other factors supporting Cochrane’s investment case include the older average age of M&S customers, meaning they are more likely to benefit from higher interest rates on savings rather than being exposed to higher mortgage costs.