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A Blue-Chip Starter Portfolio: Royal Dutch Shell Plc, BHP Billiton plc And Rolls-Royce Holding PLC

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.

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Company Industry Recent share price (p) P/E Yield (%)
ARM Holdings Technology 997 34.3 0.8
BHP Billiton (LSE: BLT) (NYSE: BBL.US) Basic Materials 1,389 11.0 5.8
British American Tobacco Consumer Goods 3,500 15.8 4.4
GlaxoSmithKline Health Care 1,376 14.9 5.9
HSBC Holdings Financials 609 10.3 5.7
National Grid Utilities 918 15.9 4.9
Rolls-Royce (LSE:RR) Industrials 870 14.0 2.8
Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) Oil & Gas 2,233 11.4 5.4
Vodafone Telecommunications 223 34.3 5.2
WPP Consumer Services 1,345 14.5 3.1

Excluding tech share ARM Holdings, the companies have an average P/E of 15.8 and an average dividend yield of 4.8%. The table below shows how the current ratings compare with those of the past.

  P/E Yield (%)
January 2015 15.8 4.8
October 2014 15.0 4.7
July 2014 14.8 4.7
April 2014 13.6 4.6
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 P/E rating of 15.8 is at its highest since I’ve been tracking the shares. This time last year the P/E was 13.6, and the year before that it was 11.4. As a group, our industry heavyweights are now starting to look a tad expensive, based on the FTSE 100 long-term average P/E of 14.

However, within the group there are some attractive P/Es. Also, dividend forecasts have held up better than earnings forecasts, meaning the collective yield of 4.8% is as high as it’s been since January 2013.

BHP Billiton is the first company I’d like to highlight for you this quarter. The mining titan trades on an attractive P/E of 11 and offers a mammoth 5.8% dividend yield. At this time two years ago Billiton’s shares were over 50% higher than today. The P/E was 12.8 and the yield was just 3.6%. Weak metals prices are behind the company’s current rating. For long-term investors now could be a good opportunity to buy.

Oil giant Royal Dutch Shell is also currently labouring in an unfavourable macro-environment. The shares have been depressed by a falling oil price in recent months. Shell now trades on a P/E of 11.4 and offers a juicy dividend yield of 5.4%. Again, this looks like a decent opportunity for long-term investors to buy into a top blue-chip behemoth.

Aerospace and defence giant Rolls-Royce, with its massive order book of long-term contracts, is more highly valued than natural resources firms by investors. At this time last year Rolls-Royce’s shares were 45% higher than today. The P/E was 17.6 and the dividend yield was 2%. We’re now looking at a P/E of 14 and a 2.8% yield. A number of factors, including Russian trade sanctions, have hit the short-term outlook and taken the shine off the shares. But again, far-sighted investors could benefit from the market’s myopia.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended shares in GSK, HSBC and ARM. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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