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 | 1,099 | 44.0 | 0.6 |
| BHP Billiton | Basic Materials | 1,869 | 11.4 | 4.2 |
| British American Tobacco | Consumer Goods | 3,238 | 14.2 | 4.6 |
| GlaxoSmithKline | Health Care | 1,611 | 13.4 | 5.1 |
| HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) |
Financials | 662 | 10.5 | 5.3 |
| National Grid | Utilities | 788 | 14.6 | 5.5 |
| Rolls-Royce | Industrials | 1,275 | 17.6 | 2.0 |
| Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) |
Oil & Gas | 2,280 | 9.6 | 5.0 |
| Tesco (LSE: TSCO) | Consumer Services | 334 | 10.5 | 4.5 |
| Vodafone | Telecommunications | 237 | 20.2 | 4.6 |
Excluding tech share ARM Holdings, the companies have an average P/E of 13.6 and an average dividend yield of 4.5%. The table below shows how the current ratings compare with those of the past.
| P/E | Yield (%) | |
|---|---|---|
| January 2014 | 13.6 | 4.5 |
| 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 |
As you can see, the group earnings rating is at its highest since I’ve been tracking the shares. 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 an opportunity nearing the upper end of fair for long-term investors to buy a blue-chip bedrock of industry heavyweights for a UK equity portfolio.
Going beyond the overall picture to the individual companies, three shares stand out on P/Es well below the average.
HSBC
Back in April, HSBC’s shares were trading at 703p. Today, the shares are around 6% lower at 662p. The forecast P/E hasn’t moved proportionately, due to some earnings downgrades, but has edged down to 10.5 from 10.7. The prospective dividend yield, though, has become a lot juicier, shooting up to 5.3% from 4.8%.
HSBC is on a ‘value’ rating you wouldn’t find in more normal economic conditions; and, sooner or later, more normal economic conditions will return. Indeed, Chief Executive Stuart Gulliver told us in a trading update in November: “We see reasons for optimism with some evidence of a broadening recovery”.
Royal Dutch Shell
Natural resources companies are going through a soft patch in their cycle, and have been generally out of favour with the market for some time. Shell was rated on a P/E of 8-9 for much of last year, with the shares trading below 2,200p at each of my quarterly reviews.
Today, the shares are a little higher at 2,280p, but the P/E remains in single-digit ‘bargain’ territory: 9.6. The dividend yield is also tasty at 5%. There are some near-term sector and company-specific headwinds for Shell, but long-term demand and management’s investment in new growth projects bode well for the future.
Tesco
Tesco’s Christmas trading update, scheduled for 9 January, will mark the second anniversary of the company’s infamous profit warning. Recovery is taking a lot longer than many investors expected. The shares haven’t really gone anywhere in two years, waxing and waning, with hopes of recovery always around the next corner.
Today, at 334p, Tesco’s shares are in an ebb — 8% lower than last quarter. The P/E has come down to 10.5 from 10.8, and the dividend yield has gone up to 4.5% from 4.3%. Things may yet get worse before they get better for Tesco, so waiting for next week’s trading update may be a prudent move.
