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 | 634 | 14.0 | 3.5 |
| British American Tobacco | Consumer Goods | 5,234 | 17.6 | 3.7 |
| GlaxoSmithKline | Health Care | 1,636 | 14.5 | 4.9 |
| HSBC Holdings | Financials | 712 | 14.3 | 5.7 |
| National Grid (LSE: NG) | Utilities | 952 | 15.0 | 4.8 |
| Rio Tinto | Basic Materials | 3,242 | 10.4 | 5.6 |
| Royal Dutch Shell (LSE: RDSB) | Oil & Gas | 2,063 | 14.0 | 7.1 |
| Sage | Technology | 688 | 20.5 | 2.4 |
| Tesco | Consumer Services | 169 | 15.8 | 2.3 |
| Vodafone | Telecommunications | 218 | 28.3 | 5.7 |
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 five years.
| P/E | Yield (%) | |
| July 2017 | 16.4 | 4.6 |
| April 2017 | 16.8 | 4.6 |
| January 2017 | 17.0 | 4.4 |
| October 2016 | 17.3 | 4.0 |
| 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 for the group 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 P/E is currently towards the expensive end of my valuation spectrum, although it has now edged lower for three successive quarters. This has been caused not so much by falling share prices as by earnings forecasts rising at a faster rate than shares have advanced.
Political noises
National Grid is the only company whose shares are significantly lower today than this time last year. At 952p, they’re over 10% down on the 1,061p of my July 2016 review. The P/E is 15 compared with 17 and the yield has moved up to 4.8% from 4.2%.
Political noises haven’t helped investor sentiment towards utilities in recent months and National Grid has suffered alongside consumer-facing peers SSE and British Gas owner Centrica. Nevertheless, as the UK’s principal operator of the country’s vital electricity infrastructure, National Grid remains one of the most defensive and stable businesses around.
With the shares down over 10% since last year, the P/E correspondingly lower and the dividend yield correspondingly higher, I view National Grid as an attractive ‘buy’ today.
Super-high yield
At a current price of 2,063p, Shell’s shares are only a tad higher than a year ago. However, due to much-improved earnings forecasts the oil giant’s P/E has fallen from 19.6 to 14. The City consensus on the dividend has also improved, meaning the prospective yield has increased from 6.4% to an even-more-eye-catching 7.1%.
Shell has never cut its dividend since the end of World War II and management is naturally keen to do everything in its power to continue this impressive record. The oil price recovered from a multi-year low of below $30 a barrel in early 2016 to above $55 by the end of the year. However, with it having slipped back to around $45 this year, some investors are getting concerned again about the sustainability of the dividend.
These concerns are not without justification but I rate the shares a ‘buy’ on the basis that the risk of a reduced dividend (which wouldn’t be entirely disastrous anyway from the current 7.1% level) is more than compensated for by the rewards if the company is able to maintain the payout.
