Every quarter I take a look at the largest 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 industry heavyweights and their current 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 | Technology | 997 | 34.3 | 0.8 |
| BHP Billiton (LSE: BLT) (NYSE: BBL.US) | Basic Materials | 1,389 | 11.0 | 5.8 |
| British American Tobacco | Consumer Goods | 3,500 | 15.8 | 4.4 |
| GlaxoSmithKline | Health Care | 1,376 | 14.9 | 5.9 |
| HSBC Holdings | Financials | 609 | 10.3 | 5.7 |
| National Grid | Utilities | 918 | 15.9 | 4.9 |
| Rolls-Royce (LSE:RR) | Industrials | 870 | 14.0 | 2.8 |
| Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) | Oil & Gas | 2,233 | 11.4 | 5.4 |
| Vodafone | Telecommunications | 223 | 34.3 | 5.2 |
| WPP | Consumer Services | 1,345 | 14.5 | 3.1 |
Excluding tech share ARM Holdings, the companies have an average P/E of 15.8 and an average dividend yield of 4.8%. The table below shows how the current ratings compare with those of the past.
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| P/E | Yield (%) | |
| January 2015 | 15.8 | 4.8 |
| October 2014 | 15.0 | 4.7 |
| July 2014 | 14.8 | 4.7 |
| April 2014 | 13.6 | 4.6 |
| January 2014 | 13.6 | 4.5 |
| October 2013 | 12.2 | 4.7 |
| July 2013 | 11.8 | 4.7 |
| April 2013 | 12.3 | 4.6 |
| January 2013 | 11.4 | 4.9 |
| October 2012 | 11.1 | 5.0 |
| July 2012 | 10.7 | 5.0 |
| October 2011 | 9.8 | 5.2 |
As you can see, the group P/E rating of 15.8 is at its highest since I’ve been tracking the shares. This time last year the P/E was 13.6, and the year before that it was 11.4. As a group, our industry heavyweights are now starting to look a tad expensive, based on the FTSE 100 long-term average P/E of 14.
However, within the group there are some attractive P/Es. Also, dividend forecasts have held up better than earnings forecasts, meaning the collective yield of 4.8% is as high as it’s been since January 2013.
BHP Billiton is the first company I’d like to highlight for you this quarter. The mining titan trades on an attractive P/E of 11 and offers a mammoth 5.8% dividend yield. At this time two years ago Billiton’s shares were over 50% higher than today. The P/E was 12.8 and the yield was just 3.6%. Weak metals prices are behind the company’s current rating. For long-term investors now could be a good opportunity to buy.
Oil giant Royal Dutch Shell is also currently labouring in an unfavourable macro-environment. The shares have been depressed by a falling oil price in recent months. Shell now trades on a P/E of 11.4 and offers a juicy dividend yield of 5.4%. Again, this looks like a decent opportunity for long-term investors to buy into a top blue-chip behemoth.
Aerospace and defence giant Rolls-Royce, with its massive order book of long-term contracts, is more highly valued than natural resources firms by investors. At this time last year Rolls-Royce’s shares were 45% higher than today. The P/E was 17.6 and the dividend yield was 2%. We’re now looking at a P/E of 14 and a 2.8% yield. A number of factors, including Russian trade sanctions, have hit the short-term outlook and taken the shine off the shares. But again, far-sighted investors could benefit from the market’s myopia.
