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My top FTSE 100 buys for a starter portfolio this summer

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. I believe there’s some great value on offer in this summer quarter.

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 647 14.4 3.5
British American Tobacco (LSE: BATS) Consumer Goods 3,830 12.4 5.5
GlaxoSmithKline Health Care 1,530 14.0 5.2
HSBC Financials 711 12.8 5.3
National Grid Utilities 838 14.5 5.7
Rio Tinto Basic Materials 4,201 12.1 5.1
Royal Dutch Shell Oil & Gas 2,714 12.7 5.2
Sage Technology 629 18.0 2.8
Tesco Consumer Services 257 17.2 2.3
Vodafone (LSE: VOD) Telecommunications 184 18.4 7.1

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 six years.

  P/E Yield (%)
July 2018 14.7 4.8
April 2018 14.2 5.0
January 2018 16.3 4.5
October 2017 16.5 4.5
July 2017 16.4 4.6
July 2016 17.2 4.4
July 2015 14.4 5.2
July 2014 13.2 4.5
July 2013 11.9 4.6
July 2012 10.7 4.7

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. In my April review, seven of the 10 companies were in my ‘good value’ band and for the first time ever all 10 companies had P/Es below 20.

This quarter, five of the 10 companies are in my ‘good value’ band and all 10 companies continue to sport P/Es below 20. The average P/E has moved up to 14.7 and the yield is a little lower at 4.8%. Nevertheless, if I were looking to invest in a blue-chip starter portfolio today, I’d still be happy to buy these 10 industry heavyweights.

Top yielder

The average gain in share price since April is almost 8%, with the biggest winners being Tesco (+24.8%), Shell (+19.2%) and Rio Tinto (+16.3%). Only three companies are lower: Sage (-1.6%), Vodafone (-5.2%) and British American Tobacco (-7.3%).

Vodafone has the highest P/E of all 10 stocks but I have to go back to October 2013 to find it lower than today’s 18.4 and to January 2013 for the last time the dividend yield was higher than the current top-yielding 7.1%.

The company’s main pieces of news since April have been the release of its annual results, the announcement of the departure of chief executive Vittorio Colao and the striking of an €18bn deal to buy Liberty Global’s German and Eastern Europe cable networks.

I don’t see too much risk in the leadership change, which has chief financial officer Nick Read taking over the reins from Mr Colao. And I agree with the positive view of my Foolish colleague Roland Head on the company’s latest results and the Liberty deal.

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Aside from concerns about regulation and a significant headwind from exchange rates expected this year, I don’t see much to justify what has been a substantial de-rating of British American Tobacco over the past year.

The P/E has never been as low as the current 12.4 in the six years of my quarterly reviews and the dividend yield has never been as high as today’s 5.5%. The company said last month that the business continues to perform well and is trading in line with management’s expectations. I believe this highly cash generative business can continue to deliver for investors for many years to come.

I’ve highlighted the two biggest fallers since April but, as I said earlier, I’d be happy to buy all 10 stocks, if I were looking to build a starter portfolio this summer.

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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, 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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