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GlaxoSmithKline plc is one of 10 top stocks for a Footsie starter portfolio

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.

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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, Royal Dutch Shell B, and Sage Group. 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.