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. I believe there’s some great value on offer in this summer quarter.
The table below shows the 10 industry heavyweights and their 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 | 647 | 14.4 | 3.5 |
| British American Tobacco (LSE: BATS) | Consumer Goods | 3,830 | 12.4 | 5.5 |
| GlaxoSmithKline | Health Care | 1,530 | 14.0 | 5.2 |
| HSBC | Financials | 711 | 12.8 | 5.3 |
| National Grid | Utilities | 838 | 14.5 | 5.7 |
| Rio Tinto | Basic Materials | 4,201 | 12.1 | 5.1 |
| Royal Dutch Shell | Oil & Gas | 2,714 | 12.7 | 5.2 |
| Sage | Technology | 629 | 18.0 | 2.8 |
| Tesco | Consumer Services | 257 | 17.2 | 2.3 |
| Vodafone (LSE: VOD) | Telecommunications | 184 | 18.4 | 7.1 |
Before looking at individual companies, let’s get a feel for overall value. The table below shows average P/Es and yields for the group as a whole for the last four quarters and six years.
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| P/E | Yield (%) | |
| July 2018 | 14.7 | 4.8 |
| April 2018 | 14.2 | 5.0 |
| January 2018 | 16.3 | 4.5 |
| October 2017 | 16.5 | 4.5 |
| July 2017 | 16.4 | 4.6 |
| July 2016 | 17.2 | 4.4 |
| July 2015 | 14.4 | 5.2 |
| July 2014 | 13.2 | 4.5 |
| July 2013 | 11.9 | 4.6 |
| July 2012 | 10.7 | 4.7 |
My rule of thumb is that an average P/E below 10 is bargain territory, 10-14 is good value and above 14 starts to move towards expensive. In my April review, seven of the 10 companies were in my ‘good value’ band and for the first time ever all 10 companies had P/Es below 20.
This quarter, five of the 10 companies are in my ‘good value’ band and all 10 companies continue to sport P/Es below 20. The average P/E has moved up to 14.7 and the yield is a little lower at 4.8%. Nevertheless, if I were looking to invest in a blue-chip starter portfolio today, I’d still be happy to buy these 10 industry heavyweights.
Top yielder
The average gain in share price since April is almost 8%, with the biggest winners being Tesco (+24.8%), Shell (+19.2%) and Rio Tinto (+16.3%). Only three companies are lower: Sage (-1.6%), Vodafone (-5.2%) and British American Tobacco (-7.3%).
Vodafone has the highest P/E of all 10 stocks but I have to go back to October 2013 to find it lower than today’s 18.4 and to January 2013 for the last time the dividend yield was higher than the current top-yielding 7.1%.
The company’s main pieces of news since April have been the release of its annual results, the announcement of the departure of chief executive Vittorio Colao and the striking of an €18bn deal to buy Liberty Global’s German and Eastern Europe cable networks.
I don’t see too much risk in the leadership change, which has chief financial officer Nick Read taking over the reins from Mr Colao. And I agree with the positive view of my Foolish colleague Roland Head on the company’s latest results and the Liberty deal.
Cheap fags
Aside from concerns about regulation and a significant headwind from exchange rates expected this year, I don’t see much to justify what has been a substantial de-rating of British American Tobacco over the past year.
The P/E has never been as low as the current 12.4 in the six years of my quarterly reviews and the dividend yield has never been as high as today’s 5.5%. The company said last month that the business continues to perform well and is trading in line with management’s expectations. I believe this highly cash generative business can continue to deliver for investors for many years to come.
I’ve highlighted the two biggest fallers since April but, as I said earlier, I’d be happy to buy all 10 stocks, if I were looking to build a starter portfolio this summer.
