Every quarter I take a look at the top 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 heavyweights and their 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 | 1,088 | 29.3 | 1.0 |
| BAE Systems (LSE: BA) | Industrials | 506 | 12.6 | 4.4 |
| British American Tobacco | Consumer Goods | 4,694 | 19.3 | 3.6 |
| GlaxoSmithKline | Health Care | 1,560 | 17.4 | 5.1 |
| HSBC Holdings | Financials | 453 | 10.6 | 7.4 |
| National Grid (LSE: NG) | Utilities | 1,061 | 17.0 | 4.2 |
| Rio Tinto | Basic Materials | 2,217 | 18.6 | 3.4 |
| Royal Dutch Shell | Oil & Gas | 2,019 | 19.6 | 6.4 |
| Tesco | Consumer Services | 171 | 22.8 | 0.9 |
| Vodafone (LSE: VOD) | Telecommunications | 223 | 34.2 | 5.2 |
To get a feel for overall value, the table below shows average P/Es and yields for the group for the last four quarters and four years. (The averages exclude ARM, with its typically elevated tech-sector P/E, and also Vodafone, whose P/E has been anomalous since its sale of Verizon Wireless).
| P/E | Yield (%) | |
| July 2016 | 17.2 | 4.4 |
| April 2016 | 16.4 | 5.0 |
| January 2016 | 13.7 | 6.0 |
| October 2015 | 13.7 | 5.6 |
| July 2015 | 14.4 | 5.2 |
| July 2014 | 13.2 | 4.5 |
| July 2013 | 11.9 | 4.6 |
| July 2012 | 10.7 | 4.7 |
Despite Brexit turbulence, the shares of seven of the eight heavyweights are higher now than at my April review (nine out of 10 including ARM and Vodafone) which has pushed the average P/E up to a new high of 17.2.
My rule of thumb for the companies as a group is that an average P/E below 10 is bargain territory, 10-14 is decent value and above 14 starts to move towards expensive.
Whatever it takes
Vodafone may not seem like an obvious share to highlight positively at the present time given its P/E of 34.2 and the fact that 55% of group profits come from Europe (the UK provides 11%). But I think the telecom giant offers good value.
The company announced earlier this year that it will start to report its financial results in euros, rather than sterling, has expressed its determination not to be excluded from the EU’s giant new single digital market, and indicated its willingness to move its headquarters from the UK, if necessary.
Vodafone’s high P/E is an artefact of its $130bn sale of Verizon Wireless, and improving free cash flow following a period of massive investment will help support the company’s very attractive dividend yield of 5.2%.
Highly stable
National Grid makes 62% of its profits from UK electricity transmission, gas transmission and distribution, and 29% from US regulated businesses. With the P/E currently at 17, the shares are at a bit of a premium price, but I believe it’s a price worth paying.
This is a highly stable business, and a solid, long-term core holding, ideal for a starter portfolio. In the shorter term, National Grid looks less vulnerable to earnings downgrades than many companies, and a 4.2% dividend yield only adds to the attraction.
Considerable appeal
Most big companies were banging the drum for a Remain vote ahead of the EU referendum, and BAE Systems was one of the more vocal. However, behind the rhetoric is a company whose largest markets are the US, UK and Saudi Arabia, with only 12% of revenue coming from Europe.
BAE hasn’t said much post-Brexit, but analysts at Berenberg reckon any impact would be “benign“. In my view, a P/E of 12.6 and a 4.4% dividend yield have considerable appeal.
