Top buys for a FTSE 100 starter portfolio

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.

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.

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.

Five best buys

Of course, there are many more companies in the FTSE 100 than the 10 industry heavyweights I focus on in these reviews. And the Motley Fool's experts have scouted the entire index to identify the very best blue-chip businesses with the ability to deliver top-notch performance through thick and thin.

Have National Grid and Shell made the cut for our experts' top five? You can discover the answer and read their analysis of all five companies in this exclusive FREE report.

The report comes with no obligation, so CLICK HERE now for your free copy.

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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