What investment opportunities are presented by the sixth largest to the tenth largest blue chips in the UK today?
Many investors prefer to put their money into large blue chips than small and mid caps. Investing in an established, successful businesses is often regarded as less risky. Dividends are often bigger and more consistent. As large companies are so well researched, their share prices are frequently less volatile than their smaller cousins.
Earlier this week, I reported on the five largest companies in the FTSE 100 (UKX). Today, I am going to tell you all about the next five biggest. These companies are all leaders in their fields and have rewarded investors well over the years.
Here are the five companies that occupy positions 6-10 in the FTSE 100.
|Company||Price (p)||P/E (forecast)||Yield (forecast, %)||Market cap (£m)|
|British American Tobacco (LSE: BATS)||3,221||15.8||4.1||63,840|
|Diageo (LSE: DGE)||1,780||17.4||2.7||45,020|
|BG (LSE: BG)||1,305||15.3||1.3||44,430|
|SABMiller (LSE: SAB)||2,716||18.4||2.3||43,540|
|Rio Tinto (LSE: RIO)||3,036||8.1||3.3||41,630|
Data from Stockopedia
6) British American Tobacco (BATS)
British American Tobacco is a cigarette manufacturer. In the premium sector, BATS owns the Dunhill, Pall Mall, Kent and Lucky Strike brands. These brands enjoyed significant growth in 2011. Consumers worldwide bought 17.7 billion more of these cigarettes than they did in 2010.
There is much to admire about BATS as an investment. First, it has been a success. In the last five years, the shares are up 88.7%. In that time, the dividend has increased each year, by an average of 17.7% per annum. This dividend is expected to continue rising for the next two years. On today's prices, the forecast yield for 2013 equates to 4.5%.
Despite BATS' success I won't be investing any time soon. Worldwide, tobacco regulations are increasingly restrictive. Priced on a forward price-to-earnings (P/E) ratio of 15.8 times consensus forecasts for 2012, BATS is not cheap.
You can't buy a pint of Diageo but you can buy shares in one of the world's leading drinks companies. Diageo owns a collection of alcoholic super-brands: from Guinness and Red Stripe to Bushmills and Baileys.
Diageo has been increasing its dividend every year since 1998. Profits are up, too; in the past five years, earnings per share (eps) has nearly doubled.
For the full year to 30 June 2012, Diageo grew sales by 6% and eps by 13%. Trade in emerging markets is particularly encouraging. Here, Diageo grew sales by 15% and operating profits by 23%.
Prospects at Diageo are also bright. The company is expected to deliver double-digit earnings growth for the next two years. This puts the shares today on a 2014 P/E of 15.6.
BG Group came into is current form in 2000. This followed the spin-out of National Grid (LSE: NG), which today owns and operates electricity and gas networks in the UK and US. The British Gas brand passed to utility firm Centrica (LSE: CNA) in 1997.
All this leaves BG as an energy company, specialising in gas. In 2010, Egypt accounted for 23% of BG's gas production. The UK delivered 21% and Kazakhstan 16%.
On the last payout, BG has a yield of 1.1%. While this is low, analysts do expect reasonable growth in the dividend in this year and the next. From the consensus forecasts available, BG's 2013 yield is 1.4%. The 2013 P/E is just 13.0 times forecast earnings. BG must deliver to maintain that rating.
SABMiller is similar to Diageo but with a stronger focus on beer. The company operates a huge range of beer brands in local markets and four key global brands. Its local brands include Fosters in Australia and Carling Black Label in South Africa. SABMiller's global brands are Grolsch, Miller Genuine Draft, Peroni and Pilsner Urquell.
I'm inclined to prefer SABMiller to Diageo. While both are valued similarly, SABMiller has much better exposure to faster growing markets. In their last reported results, SABMiller announced a 13% increase in revenues. This was helped by 14% increases in Latin America and Africa. Earnings from the Asia Pacific region soared 30%.
Shares in SABMiller have dipped recently. Currently, the stock is around 6% off the all-time high it reached in August.
SABMiller is expected to grow earnings and dividend by more than 10% a year for the next two years.
10) Rio Tinto
Rio Tinto's history goes back to 1873, when investors formed a company in London to mine copper in Spain. Today, Rio employs 77,000 people in more than 40 countries.
In the first six months of the year, the largest part of Rio Tinto's revenues were derived from iron ore. Second largest was aluminium, followed by copper and coal. Iron ore accounted for more than double the income from aluminium.
Recent fears about the Chinese economy have hit the Rio Tinto share price. In the last six months, the price of iron ore on the international markets is off by around 30%. In this time, shares in Rio Tinto are down 12.4%.
At today's price, the market is clearly expecting Rio Tinto earnings to decline. Given the market's patchy record of predicting economic trends, Rio Tinto could be an opportunity for investors that are prepared to go against the consensus view.
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Further investment opportunities:
> David does not own shares in any of the above companies.