A Blue-Chip Starter Portfolio: BHP Billiton, HSBC Holdings, and Royal Dutch Shell

LONDON -- 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 (pence)

P/E

Yield (%)

ARM Holdings

Technology

921

44.9

0.6

BHP Billiton 

Basic materials

1,915

10.1

4.1

British American Tobacco

Consumer goods

3,527

15.0

4.3

GlaxoSmithKline

Health care

1,539

13.0

5.1

HSBC Holdings 

Financials

703

10.7

4.8

National Grid

Utilities

765

14.0

5.5

Rolls-Royce

Industrials

1,130

16.9

2.0

Royal Dutch Shell 

Oil and gas

2,185

8.0

5.4

Tesco

Consumer services

382

11.6

4.1

Vodafone

Telecommunications

187

11.4

5.9

Excluding tech share ARM Holdings, the companies have an average P/E ratio of 12.3 and an average dividend yield of 4.6%. The table below shows how the current ratings compare with those of the past.

Month 

P/E

Yield (%)

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 of nine industry heavyweights is rated more highly today than at any time in the past couple of years.

My rule of thumb for this group is that an average P/E below 10 is firmly in "good value" territory, while a P/E above 14 starts to move toward expensive. On this spectrum, the group as a whole is neither cheap nor expensive. As such, I think the market currently offers a fair opportunity for long-term investors to buy a blue-chip bedrock of industry heavyweights for a U.K. equity portfolio.

At the individual company level, there are three stocks whose ratings compare favorably with their level three months ago. So, let's have a look at them.

BHP Billiton
After strong rises in equity markets since the start of the year, the share prices of eight of the U.K.'s 10 industry giants are higher today than when I last looked at them in January. Global mining titan BHP Billiton is the bigger underperformer of the two exceptions: The company's shares are trading at 1,915 pence compared with 2,145 pence last time.

BHP Billiton's drop in share price and some upgrades to forecast earnings and dividends bring the P/E down to an attractive-looking 10.1 from 12.8, while the yield rises to an industry-leading 4.1% from 3.6%.

Royal Dutch Shell
Oil supermajor Royal Dutch Shell is the other company whose shares are lower today than three months ago -- but by very little: 2,185 pence compared with 2,197 pence.

Shell's P/E remains firmly in "value" territory at a mere eight (the same as last time), making the company the only one of our industry giants with an earnings multiple in single digits at the present time. Meanwhile, the dividend yield has edged up from 5.1% to an even-juicier 5.4%.

HSBC
Banking behemoth HSBC, in contrast to BHP Billiton and Shell, has seen its shares rise since January: by 8% to 703 pence from 651 pence.

Nevertheless, as a result of the City's more optimistic earnings and dividend outlook, HSBC's P/E today is only fractionally higher than last time: 10.7 compared with 10.6. The company's sector-leading dividend yield has nudged up to 4.8% from 4.6%.

Finally, if you already have BHP Billiton, Shell, and HSBC tucked away in your portfolio and are in the market for more blue-chip shares, I recommend you help yourself to the very latest free Motley Fool report.

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The article A Blue-Chip Starter Portfolio: BHP Billiton, HSBC Holdings, and Royal Dutch Shell originally appeared on Fool.com.

G.A. Chester owns no shares of companies mentioned in this article. The Motley Fool owns shares of Tesco and has recommended shares of Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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