My top FTSE 100 buys for a starter portfolio this autumn

These FTSE 100 (INDEXFTSE:UKX) industry giants haven’t been this cheap for four years.

| 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 biggest FTSE 100 companies in each of the index’s 10 industries to see how they shape up as a potential starter portfolio. Right now, the average earnings rating of this group of Titans is cheaper than it’s been for four years.

The table below shows their individual valuations based on forecast 12-month price-to-earnings (P/E) ratios and dividend yields.

Company Industry Share price (p) P/E Yield (%)
BAE Systems Industrials 623 13.8 3.8
British American Tobacco Consumer Goods 3,503 11.2 6.0
GlaxoSmithKline Health Care 1,532 13.4 5.2
HSBC Financials 670 11.5 6.0
National Grid Utilities 787 13.4 6.1
Rio Tinto Basic Materials 3,843 11.2 5.6
Royal Dutch Shell Oil & Gas 2,696 11.3 5.4
Sage Technology 580 16.3 3.1
Tesco Consumer Services 237 14.9 2.9
Vodafone (LSE: VOD) Telecommunications 162 16.3 8.5

The average P/E of the group is 13.3 and the average dividend yield is 5.3%. To put this into historical context, the table below shows average P/Es and yields for the last four quarters and seven years.

  P/E Yield (%)
October 2018 13.3 5.3
July 2018 14.7 4.8
April 2018 14.2 5.0
January 2018 16.3 4.5
October 2017 16.5 4.5
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

As you can see, you have to go back to 2014 to find the group average P/E cheaper than it is today. Furthermore, at 13.3 it’s back in my ‘good value’ band. My rule of thumb is that an average P/E below 10 is bargain territory, 10 to 14 is good value and above 14 starts to move towards expensive.

If I were looking to purchase a starter portfolio today, I’d happily buy these 10 industry heavyweights, with the exception of one. The exception is technology firm Sage, which I personally see as a stock to avoid for the time being. I believe the company may struggle to hit its near-term guidance and longer-term growth and margin targets. And my concerns are compounded by the recent abrupt departure of its chief executive after less than four years. Having said that, a number of my colleagues continue to rate the stock a ‘buy’.

Massive yield

Aside from Sage, the other nine stocks are eminently buyable in my book. Such is the value on offer that I find it hard to highlight any single one. Vodafone is perhaps the most eye-catching, due to its massive 8.5% dividend yield. I continue to believe the market is mispricing the telecoms giant.

I reckon concerns about competition in some of the group’s territories are overstated and I view its agreed €18bn acquisition of Liberty Global‘s cable networks in Germany and eastern Europe in a positive light. In contrast to Sage, the departure of Vodafone’s chief executive after 10 years is a well-planned succession, so I don’t see this as a great worry.

Finally, while the company’s dividend isn’t fully covered by accounting earnings, it is by free cash flow. Typically, when a company’s yield is as high as Vodafone’s 8.5% one of two things happen to bring it back to a more reasonable level. Either the dividend gets cut or the market comes to believe it’s sustainable and the share price rises strongly. I think there’s a good chance it could be the latter in Vodafone’s case. It reminds me somewhat of Shell, which I highlighted at 1,351p with a 9.1% yield back in January 2016. Market fears of a dividend cut proved unfounded and Shell’s shares have made terrific gains over the last few years.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings, Sage Group, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

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

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »