Every quarter I take a look at the largest FTSE 100 constituents in each of the indexs 10 industries to see how they shape up as a potential starter portfolio.
The table below shows the current 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 (%) |
ARM Holdings (LSE: ARM) | Technology | 935 | 26.9 | 1.1 |
BAE Systems | Industrials | 444 | 11.3 | 4.8 |
British American Tobacco | Consumer Goods | 3,588 | 16.5 | 4.5 |
GlaxoSmithKline | Health Care | 1,268 | 15.4 | 6.3 |
HSBC Holdings (LSE: HSBA) | Financials | 503 | 9.4 | 6.7 |
National Grid | Utilities | 920 | 15.4 | 4.8 |
Rio Tinto | Basic Materials | 2,220 | 13.2 | 6.7 |
Royal Dutch Shell (LSE: RDSB) | Oil & Gas | 1,601 | 11.5 | 7.7 |
Sky | Consumer Services | 1,041 | 16.6 | 3.4 |
Vodafone | Telecommunications | 204 | 35.8 | 5.7 |
To get a feel for overall value, the table below shows average P/Es and yields at my quarterly review dates. The averages exclude ARM, with its typically elevated tech-sector P/E, and also Vodafone, whose P/E has been anomalous since its mega-sale of Verizon Wireless last year.
P/E | Yield (%) | |
October 2015 | 13.7 | 5.6 |
July 2015 | 14.4 | 5.2 |
April 2015 | 14.9 | 4.8 |
January 2015 | 13.5 | 4.8 |
October 2014 | 13.1 | 4.6 |
July 2014 | 13.2 | 4.5 |
April 2014 | 12.8 | 4.6 |
January 2014 | 12.7 | 4.5 |
October 2013 | 12.1 | 4.7 |
July 2013 | 11.9 | 4.6 |
April 2013 | 12.4 | 4.4 |
January 2013 | 11.7 | 4.6 |
October 2012 | 11.1 | 4.7 |
July 2012 | 10.7 | 4.7 |
October 2011 | 9.8 | 5.0 |
My rule of thumb for the companies as a group is that an average P/E below 10 is bargain territory, 10-14 is decent value, while above 14 starts to move towards expensive.
Todays P/E hasnt fallen as much as one might have expected, given the decline in the FTSE 100 over the summer. This is because, while share prices have fallen, earnings forecasts have also been lowered. Nevertheless, an average P/E of 13.7 suggests todays starter portfolio is decent overall value.
The dividend yield of 5.6% is particularly eye-catching. Dividend forecasts havent been downgraded as much as earnings forecasts, which is why the yield is so high. You can see that the current P/E is only marginally different from its level in January, but that the dividend yield is considerably higher than Januarys 4.8%.
Ive mentioned this feature several times this year, suggesting that we could be in for a spell of little or no dividend growth from some companies and maybe the odd dividend cut to bring the yield and P/E back into a more normal relationship. Indeed, a couple of companies have already announced an intention to peg their dividends at the same level as last year for the time being.
Oil titan Shell has the highest yield of all at 7.7% and is one of the companies that has said it wont be increasing its dividend this year. Nevertheless, because the yield is so high, Shell still looks an attractive investment. The P/E of 11.5 also indicates value, while the share price of 1,601p is lower than its been at any of my previous reviews. Of course, low oil prices are currently hurting Shells earnings, but everything points to good value in the shares for long-term investors.
Global banking giant HSBC has similar value credentials to Shell. The banks P/E of 9.5 is in bargain territory, the dividend yield of 6.7% is higher than its been at any of my previous reviews, while I have to go back to my October 2011 review to find the share price lower than todays 503p. HSBC is out of favour with the market, because of the groups large exposure to Asia and concerns about slowing growth in China. As with Shell, though, everything points to good value in HSBCs shares for long-term investors.
Finally, ARM, the world-leading designer of energy-efficient microchips, may not appear obvious value at a P/E of 26.9 and a yield of 1.1%, but, as I mentioned earlier, technology companies tend to command higher ratings. ARM may be a giant, but its still increasing its earnings at a faster rate than many smaller growth companies. ARMs P/E is currently lower, and its yield higher, than at any of my previous reviews (the P/E has been as high as 44.9 and the yield as low as 0.6%). There are concerns that ARM may not be able to increase earnings as fast as in the past, but I would say the downgrade in P/E already discounts that possibility, and so the shares appear good value.
Finally, there are many other FTSE 100 blue-chips going cheap today. You may want to consider the five companies discussed in depth by our top analysts in this FREE Motley Fool report.
Our analysts are confident this group of elite firms has what it takes to deliver outstanding performance for investors. In fact, such is their conviction about the quality of these businesses that they’ve called the report “5 Shares To Retire On“.
You can download this free no-obligation report right now — simply click here for your copy.
G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Sky, GSK, ARM Holdings and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.