Every quarter I take a look at the biggest FTSE 100 companies in each of the index’s 10 industries to see how they shape up as a potential starter portfolio. Right now, the average earnings rating of this group of Titans is cheaper than it’s been for four years.
The table below shows their individual valuations based on forecast 12-month price-to-earnings (P/E) ratios and dividend yields.
| Company | Industry | Share price (p) | P/E | Yield (%) |
| BAE Systems | Industrials | 623 | 13.8 | 3.8 |
| British American Tobacco | Consumer Goods | 3,503 | 11.2 | 6.0 |
| GlaxoSmithKline | Health Care | 1,532 | 13.4 | 5.2 |
| HSBC | Financials | 670 | 11.5 | 6.0 |
| National Grid | Utilities | 787 | 13.4 | 6.1 |
| Rio Tinto | Basic Materials | 3,843 | 11.2 | 5.6 |
| Royal Dutch Shell | Oil & Gas | 2,696 | 11.3 | 5.4 |
| Sage | Technology | 580 | 16.3 | 3.1 |
| Tesco | Consumer Services | 237 | 14.9 | 2.9 |
| Vodafone (LSE: VOD) | Telecommunications | 162 | 16.3 | 8.5 |
The average P/E of the group is 13.3 and the average dividend yield is 5.3%. To put this into historical context, the table below shows average P/Es and yields for the last four quarters and seven years.
| P/E | Yield (%) | |
| October 2018 | 13.3 | 5.3 |
| July 2018 | 14.7 | 4.8 |
| April 2018 | 14.2 | 5.0 |
| January 2018 | 16.3 | 4.5 |
| October 2017 | 16.5 | 4.5 |
| October 2016 | 17.3 | 4.0 |
| October 2015 | 13.7 | 5.6 |
| October 2014 | 13.1 | 4.6 |
| October 2013 | 12.1 | 4.7 |
| October 2012 | 11.1 | 4.7 |
| October 2011 | 9.8 | 5.0 |
As you can see, you have to go back to 2014 to find the group average P/E cheaper than it is today. Furthermore, at 13.3 it’s back in my ‘good value’ band. My rule of thumb is that an average P/E below 10 is bargain territory, 10 to 14 is good value and above 14 starts to move towards expensive.
If I were looking to purchase a starter portfolio today, I’d happily buy these 10 industry heavyweights, with the exception of one. The exception is technology firm Sage, which I personally see as a stock to avoid for the time being. I believe the company may struggle to hit its near-term guidance and longer-term growth and margin targets. And my concerns are compounded by the recent abrupt departure of its chief executive after less than four years. Having said that, a number of my colleagues continue to rate the stock a ‘buy’.
Massive yield
Aside from Sage, the other nine stocks are eminently buyable in my book. Such is the value on offer that I find it hard to highlight any single one. Vodafone is perhaps the most eye-catching, due to its massive 8.5% dividend yield. I continue to believe the market is mispricing the telecoms giant.
I reckon concerns about competition in some of the group’s territories are overstated and I view its agreed €18bn acquisition of Liberty Global‘s cable networks in Germany and eastern Europe in a positive light. In contrast to Sage, the departure of Vodafone’s chief executive after 10 years is a well-planned succession, so I don’t see this as a great worry.
Finally, while the company’s dividend isn’t fully covered by accounting earnings, it is by free cash flow. Typically, when a company’s yield is as high as Vodafone’s 8.5% one of two things happen to bring it back to a more reasonable level. Either the dividend gets cut or the market comes to believe it’s sustainable and the share price rises strongly. I think there’s a good chance it could be the latter in Vodafone’s case. It reminds me somewhat of Shell, which I highlighted at 1,351p with a 9.1% yield back in January 2016. Market fears of a dividend cut proved unfounded and Shell’s shares have made terrific gains over the last few years.
