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A Blue-Chip Starter Portfolio: BHP Billiton plc (ADR) (BBL), HSBC Holdings plc (ADR) (HBC), and Royal Dutch Shell plc (ADR) (RDS.A)

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 (NYSE:BBL) 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 plc (ADR) (NYSE:BBL)
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 plc (ADR) (NYSE:BBL) 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 plc (ADR) (NYSE:BBL)’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 plc (ADR) (NYSE:RDS.A)
Oil supermajor Royal Dutch Shell plc (ADR) (NYSE:RDS.A) 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 Holdings plc (ADR) (NYSE:HBC)
Banking behemoth HSBC Holdings plc (ADR) (NYSE:HBC), in contrast to BHP Billiton plc (ADR) (NYSE:BBL) 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 Holdings plc (ADR) (NYSE:HBC)’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%.

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.

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