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A Blue-Chip Starter Portfolio: HSBC Holdings plc, Royal Dutch Shell Plc and National Grid plc

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.

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G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline and owns shares in Tesco and Vodafone.