Top buys for a Footsie starter portfolio

G A Chester’s quarterly review of how 10 UK industry giants shape up as a starter portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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 (%)
BAE Systems Industrials 643 14.4 3.5
British American Tobacco Consumer Goods 5,300 18.1 3.6
GlaxoSmithKline Health Care 1,660 14.9 4.8
HSBC Holdings Financials 651 13.3 6.3
National Grid Utilities 1,014 15.7 4.5
Rio Tinto Basic Materials 3,210 9.1 6.3
Royal Dutch Shell Oil & Gas 2,185 14.2 6.8
Sage (LSE: SGE) Technology 631 18.6 2.7
Tesco (LSE: TSCO) Consumer Services 186 18.7 1.7
Vodafone Telecommunications 208 31.3 6.0

Before looking at which individual companies might be particularly good buys today, let’s get a feel for the overall value.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

The table below shows average P/Es and yields for the group for the last four quarters and four years.

  P/E Yield (%)
April 2017 16.8 4.6
January 2017 17.0 4.4
October 2016 17.3 4.0
July 2016 17.2 4.4
April 2016 16.4 5.0
April 2015 14.9 4.8
April 2014 12.8 4.6
April 2013 12.4 4.4

My rule of thumb for the group is that an average P/E below 10 is bargain territory, 10-14 is good value and above 14 starts to move towards expensive.

As you can see, the group P/E is currently towards the expensive end of my range — although it has edged lower over the past three quarters and the dividend yield has ticked higher. This seems to reflect rising earnings and dividend forecasts (probably in large part due to weak sterling helping these multinational businesses) and share prices rising not quite as fast as the forecasts.

Which stocks offer good value today?

HSBC, Rio Tinto and Royal Dutch Shell have the three lowest P/Es and highest yields. They continue to look good value today but I’ve highlighted them for you at much lower prices previously, so I’m going to turn my attention to two companies that aren’t obviously cheap but which I think are worth considering at this time.

I have to go back to my quarterly review of January 2016 for the last time Tesco (LSE: TSCO) was on a P/E of below 20. Today’s P/E of 18.7 is still relatively high, but with chief executive Dave Lewis’s turnaround plan gaining traction, the multiple falls to nearer 14 on a 24-month view.

When you consider that Tesco’s annual revenue is about one-and-a-third times that of Sainsbury’s and Morrisons combined, it should be no suprise that it has taken time to manoeuvre this metaphorical super tanker back on course. It’s now looking like full steam ahead and with its economies of scale, Tesco should be able to print above-sector-average profit margins in due course.

A deal to acquire leading wholesaler Booker may or may not go ahead, but either way, I believe now could be a good time to pick up shares in the UK’s dominant supermarket.

Also good value

Finally, I think shares of accountancy software and services giant Sage (LSE: SGE) could also be worth buying at their current level. The P/E of 18.6 is on a par with Tesco’s, but tech company multiples tend to be higher than average and Sage is trading at a decent discount to its sector peers.

This global operator has been investing and transforming its business model for a new phase of growth. I’m expecting to see both rising revenues and expanding profit margins coming through over the next few years. Sage may even be able to exceed consensus City forecasts, which are currently depressed by a couple of particularly bearish analysts.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Booker, HSBC Holdings, Rio Tinto, Royal Dutch Shell B, and Sage Group. 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.

More on Investing Articles

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »