A Blue-Chip Starter Portfolio: Tesco PLC, BHP Billiton plc And ARM Holdings plc

How do Tesco PLC (LON:TSCO), BHP Billiton plc (LON:BLT), ARM Holdings plc (LON:ARM), and the UK’s other seven 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 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 (LSE: ARM) (NASDAQ: ARMH.US) Technology 795 34.6 0.8
BHP Billiton (LSE: BLT) Basic Materials 1,682 9.3 4.8
British American Tobacco Consumer Goods 3,368 14.1 4.6
GlaxoSmithKline Health Care 1,648 13.5 4.6
HSBC Holdings Financials 682 10.3 5.2
National Grid Utilities 746 13.7 5.7
Rolls-Royce Industrials 1,134 16.4 2.0
Royal Dutch Shell Oil & Gas 2,176 7.9 5.4
Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) Consumer Services 331 9.9 4.7
Vodafone Telecommunications 188 11.5 5.5

Excluding tech share ARM Holdings, the companies have an average P/E of 11.8 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 (%)
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

As you can see, the group of nine industry heavyweights was rated more highly last April than at any time in the past couple of years. This quarter, the P/E has moderated and the dividend yield has increased a notch.

My rule of thumb for this group 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 reasonably good opportunity for long-term investors to buy a blue-chip bedrock of industry heavyweights for a UK equity portfolio — compared with what I described as a fair opportunity last quarter.

Going beyond the overall average to the individual company level, there are three stocks in particular that have caught my eye.


After the recent weakness in equity markets, the P/Es of eight of the UK’s 10 industry giants are lower today than when I last looked at them in April. Tesco is among the companies whose P/Es have fallen the most.

The shares of the UK’s no. 1 supermarket have dropped 13% to 331p from 382p. The P/E has come down to 9.9 from 11.6, while the yield has gone up to 4.7% from 4.1%. Tesco’s P/E and yield are back to a level not seen in my quarterly reviews since October last year.

BHP Billiton

BHP Billiton’s shares have seen a similar degree of weakness to Tesco’s. Since April, the global mining giant’s shares have fallen 12% to 1,682p from 1,915p. The P/E has come down to 9.3 from 10.1, while the yield has gone up to 4.8% from 4.1%.

Going back to the start of the year, BHP Billiton’s shares were as high as 2,145p, with the P/E at 12.8 and the yield as low as 3.6%. Moreover, the market’s spurning of the company — and miners in general — stretches way back beyond six months. BHP Billiton’s recent share-price low of 1,670p was last seen during the summer of 2009.

ARM Holdings

It may seem strange that I’m highlighting tech company ARM Holdings when it has the highest P/E and lowest yield of all 10 stocks. “What about Shell or HSBC?” I hear you say. Well, while Shell and HSBC are offering low P/Es and high yields, the ratings are not markedly changed from when I highlighted the two companies as value opportunities last quarter.

In contrast, ARM’s shares have fallen 14% to 795p from 921p. The P/E has come down to 34.6 from 44.9, while the yield — less important for a growth company such as ARM — has nudged up to 0.8% from 0.6%. If you’re interested in having a high-growth tech blue chip in your portfolio at all, it’s rare to find ARM’s P/E as low as it is today.

Finally, if you already have Tesco, BHP Billiton and ARM tucked away in your portfolio and are in the market for more blue-chip shares, I recommend you help yourself to the very latest free Motley Fool report.

You see, the Fool’s top analysts have identified a select group of Footsie companies they believe will generate superior long-term growth. Such is their conviction about the quality of these businesses that they’ve called the report “5 Shares To Retire On“.

You can download this free report right now — simply click here.

> G A Chester does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco.

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.

More on Investing Articles

Investing Articles

How to invest £1,000 in an ISA and aim for a second income of £171,523

Dividend stocks are a natural choice for investors seeking a second income. But this might involve missing out on some…

Read more »

Investing Articles

Down over 70% in 5 years, will the TUI share price ever recover?

The last few years have been bumpy for the travel sector. But with the TUI share price still down substantially,…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The Spirax share price has gone nowhere in five years! Time to buy?

The Spirax share price stands almost exactly where it did five years ago. Our writer asks why? And, more importantly,…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

3 shares I’m avoiding like the plague in today’s stock market

Our writer picks a trio of shares from the London stock market he has no plans to buy right now,…

Read more »

Investing Articles

Up 167% in 2024! Is this growth stock showing any signs of slowing?

With artificial intelligence (AI) changing the world in the last few years, growth stock Nvidia has enjoyed an incredible run.…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Lloyds’ share price is dirt cheap! But I’d still avoid it like the plague

Lloyds' share price looks a brilliant bargain at 59p. But closer inspection suggests this could be a FTSE 100 share…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Here’s how investing £83 a week in FTSE 100 shares could make me rich

By putting less than £90 each week into FTSE 100 shares, this writer thinks he could build a portfolio worth…

Read more »

Growth Shares

Down 88% in 3 years, I think the boohoo share price is ready for a comeback

Jon Smith flags up why some of the problems facing the boohoo share price should fade in the coming year…

Read more »