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My top FTSE 100 buys for an instant 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. Right now, with the Footsie down 10% from its high, I see great value on offer.

The table below shows the 10 industry heavyweights and their valuations based on forecast 12-month price-to-earnings (P/E) ratios and dividend yields.

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Company Industry Share price (p) P/E Yield (%)
BAE Systems Industrials 581 13.4 3.9
British American Tobacco Consumer Goods 4,131 13.2 5.0
GlaxoSmithKline Health Care 1,394 12.9 5.7
HSBC (LSE: HSBA) Financials 665 12.4 5.7
National Grid Utilities 802 13.5 5.8
Rio Tinto Basic Materials 3,611 11.0 5.6
Royal Dutch Shell Oil & Gas 2,277 13.1 5.9
Sage Technology 639 18.1 2.8
Tesco Consumer Services 206 15.0 2.5
Vodafone Telecommunications 194 19.8 6.9

Before looking at individual companies, let’s get a feel for overall value. The table below shows average P/Es and yields for the group as a whole for the last four quarters and five years.

  P/E Yield (%)
April 2018 14.2 5.0
January 2018 16.3 4.5
October 2017 16.5 4.5
July 2017 16.4 4.6
April 2017 16.8 4.6
April 2016 16.4 5.0
April 2015 14.9 4.8
April 2014 12.8 4.6
April 2013 12.4 4.4

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 group’s current P/E of 14.2 is lower than it’s been in a good long while. It’s also notable that as many as seven of the 10 companies are in my ‘good value’ band of 10 to 14.

Furthermore, of the three higher-rated companies, Sage (18.1) is in the technology sector, which always tends to sport above-average P/Es, and the earnings of Tesco (15) and Vodafone (19.8) are recovering fast after major drops in recent years. Remarkably, this is my first quarterly review ever in which the P/Es of all 10 companies are below 20. As such, if I were looking to invest in a blue-chip starter portfolio today, I’d be happy to buy these 10 industry heavyweights.

Global banking giant

I highlighted BAE Systems and Rio Tinto in my last quarterly review. The latter’s shares have since slipped further and it now has the lowest P/E of the group by some margin, with a multiple of 11.

HSBC, with the second-lowest P/E of 12.4, also catches my eye. This global giant, with its international network covering 90% of global trade flows, has been through years of restructuring since the financial crisis. However, its latest robust results and City expectations for the coming years, suggest the tide is finally turning.

The group is forecast to post another step-change in earnings this year, followed by annual increases of around 10% in 2019 and 2020, as it capitalises on broad-based global growth. Consensus expectations are for the current annual dividend of $0.51 (5.7% yield) to begin increasing from 2020.

In addition to $10.2bn paid out in dividends in 2017 (more than any other European or US bank), HSBC returned a total of $3bn to shareholders through share buybacks. As its capital base continues to strengthen, management plans further buybacks as and when appropriate.

I’ve singled out the attractions of HSBC this quarter but, as I said earlier, I really see value everywhere I look across the 10 industry heavyweights. Even Vodafone, with the highest P/E, has the compensation of a mammoth 6.9% dividend yield.

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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, 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.

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