A Blue-Chip Starter Portfolio: BHP Billitonc, 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.

CompanyIndustryRecent Share Price (in pence)P/EYield (%)
ARM HoldingsTechnology92144.90.6
BHP Billiton  Basic Materials1,91510.14.1
British American TobaccoConsumer Goods3,52715.04.3
GlaxoSmithKlineHealth Care1,53913.05.1
HSBC Holdings Financials70310.74.8
National GridUtilities76514.05.5
Royal Dutch Shell  Oil & Gas2,1858.05.4
TescoConsumer Services38211.64.1

Excluding tech share ARM Holdings, the companies have an average price-to-earnings (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.

 P/EYield (%)
April 201312.34.6
January 201311.44.9
October 201211.15.0
July 201210.75.0
October 20119.85.2

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 super-major 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 the single digits at the present time. Meanwhile, the dividend yield has edged up from 5.1% to an even-juicier 5.4%.

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.

You see, the Fool's top analysts have identified a select group of Footsie companies they believe will generate superior long-term growth. 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 report right now -- simply click here.

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

G. A. Chester does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Vodafone.  The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story