Every quarter I take a look at the top 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 heavyweights and their valuations based on forecast 12-month price-to-earnings (P/E) ratios and dividend yields.
| Company | Industry | Recent share price (p) | P/E | Yield (%) |
| BAE Systems | Industrials | 612 | 13.9 | 3.7 |
| British American Tobacco (LSE: BATS) | Consumer Goods | 4,774 | 15.5 | 4.1 |
| GlaxoSmithKline (LSE: GSK) | Health Care | 1,530 | 13.6 | 5.2 |
| HSBC Holdings | Financials | 756 | 13.9 | 5.3 |
| National Grid | Utilities | 935 | 15.0 | 5.0 |
| Rio Tinto | Basic Materials | 3,685 | 12.4 | 4.8 |
| Royal Dutch Shell | Oil & Gas | 2,336 | 16.3 | 6.2 |
| Sage | Technology | 727 | 22.1 | 2.4 |
| Tesco | Consumer Services | 188 | 16.1 | 2.5 |
| Vodafone | Telecommunications | 212 | 25.9 | 6.2 |
Before looking at which individual companies might be particularly good buys today, let’s get a feel for the 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.
| P/E | Yield (%) | |
| October 2017 | 16.5 | 4.5 |
| July 2017 | 16.4 | 4.6 |
| April 2017 | 16.8 | 4.6 |
| January 2017 | 17.0 | 4.4 |
| October 2016 | 17.3 | 4.0 |
| October 2015 | 13.7 | 5.6 |
| October 2014 | 13.1 | 4.6 |
| October 2013 | 12.1 | 4.7 |
| October 2012 | 11.1 | 4.7 |
| October 2011 | 9.8 | 5.0 |
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.
As you can see, the P/E has edged up this quarter after three successive falls and remains towards the expensive end of my valuation spectrum. This doesn’t mean that the group of companies can’t deliver a good return for investors, just that it could take longer to achieve than if the stocks were bought at a lower valuation.
Sin stock on offer
British American Tobacco (BAT) is one stock I’d highlight as looking particularly buyable today. The current P/E of 15.5 is a little above my 10-14 good value segment but so-called ‘defensive’ sectors, such as tobacco, routinely trade on higher P/Es.
BAT’s P/E was 17.6 last quarter and I have to go back to my October 2014 review to find the last time it was available on a P/E as low as the current 15.5. The current dividend yield of 4.1% also compares favourably with last quarter’s 3.7%.
At 4,774p, BAT’s shares are down 8.8% from 5,234p last quarter, despite a modest upgrade to its forward 12-month earnings and dividend forecasts. This combination of factors has led to today’s significantly lower P/E and more generous yield.
Health choice also cheap
GlaxoSmithKline (GSK) is another defensive stock I’d highlight as looking very buyable today. I have to go back to my January 2014 review to find the last time this stock was available on a P/E as low as its current 13.6. And it was three quarters ago that it was last offering a yield as high as today’s 5.2%.
At 1,530p, GSK’s shares are down 6.5% from 1,636p last quarter when its P/E was 14.5 and yield 4.9%. The forward 12-month earnings and dividend forecasts are little changed, so it’s the lower share price alone that accounts for the more attractive valuation today.
Elsewhere, shares of National Grid, which I spotlighted for you last quarter, have since edged down 1.8%. This has been enough to take the yield up to nudge 5% for the first time since my July 2015 review.
