Every quarter I take a look at the largest FTSE 100 companies in each of the index’s 10 industries to see how they shape up as a potential ‘starter’ portfolio.
The table below shows the 10 industry heavyweights and their current valuations based on forecast 12-month price-to-earnings (P/E) ratios and dividend yields.
| Company | Industry | Recent share price (p) | P/E | Yield (%) |
|---|---|---|---|---|
| ARM Holdings | Technology | 1,010 | 41.3 | 0.6 |
| BHP Billiton | Basic Materials | 1,841 | 11.2 | 4.2 |
| British American Tobacco | Consumer Goods | 3,295 | 14.1 | 4.6 |
| GlaxoSmithKline | Health Care | 1,569 | 12.7 | 5.2 |
| HSBC Holdings (LSE: HSBA) (NYSE: HBC.US) | Financials | 678 | 10.3 | 5.3 |
| National Grid (LSE: NG) | Utilities | 739 | 13.7 | 5.8 |
| Rolls-Royce | Industrials | 1,125 | 15.9 | 2.2 |
| Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) | Oil & Gas | 2,146 | 8.2 | 5.6 |
| Tesco | Consumer Services | 363 | 10.8 | 4.3 |
| Vodafone | Telecommunications | 217 | 13.3 | 4.8 |
Excluding tech share ARM Holdings, the companies have an average P/E of 12.2 and an average dividend yield of 4.7%. The table below shows how the current ratings compare with those of the past.
| P/E | Yield (%) | |
|---|---|---|
| October 2013 | 12.2 | 4.7 |
| July 2013 | 11.8 | 4.7 |
| April 2013 | 12.3 | 4.6 |
| January 2013 | 11.4 | 4.9 |
| October 2012 | 11.1 | 5.0 |
| July 2012 | 10.7 | 5.0 |
| October 2011 | 9.8 | 5.2 |
My rule of thumb is that an average P/E below 10 is firmly in ‘bargain’ territory, while a P/E above 14 starts to move towards ‘expensive’. On this spectrum I think the market is currently offering a fair opportunity for long-term investors to buy a blue-chip bedrock of industry heavyweights for a UK equity portfolio.
Going beyond the overall average to the individual company level, the three highest-yielding stocks are particularly eye-catching this quarter.
HSBC
Banking behemoth HSBC has seen some downgrades to revenue and earnings forecasts over the year, but dividend forecasts have actually ticked modestly up. At a share price of 678p, the prospective yield of 5.3% is higher than it’s been in my previous quarterly reviews. And, despite the moderation in earnings expectations, HSBC’s P/E of 10.3 is still comfortably on the value side of the average.
Royal Dutch Shell
When it comes to value-level P/Es, Shell takes the honours by a country mile. The oil major has been rated on around eight times forecast earnings for some time. This is another case where analysts have moderated their revenue and earnings forecasts, but nudged up their dividend estimates. As such, at 2,146p, Shell yields a prospective 5.6%. Like HSBC, Shell’s yield is higher than in previous quarterly reviews.
National Grid
National Grid’s shares peaked at close to 850p back in May. At a recent price of 739p they are closer to their 52-week low of 682p than their early-summer high. Analyst dividend forecasts give a yield of 5.8%. You’ll have to pay a relatively rich P/E of 13.7 for that terrific income, but as a regulated business, National Grid and its earnings are more stable than those of HSBC and Shell.