My top buys for a FTSE 100 starter portfolio in this market slump

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Every quarter I take a look at 10 industry heavyweights in the FTSE 100 to see how they shape up as a potential starter portfolio. With the market having slumped since my last regular review in January, I'm taking a mid-quarter look at what bargains might be on offer today.

The table below shows share prices, forecast 12-month price-to-earnings (P/E) ratios and dividend yields for the 10 heavyweights at 1 January and at yesterday's market close.

Company

Share price 1 Jan (p)

Share price 12 Feb (p)

Price fall (%)

P/E 1 Jan

P/E 12 Feb

Yield 1 Jan (%)

Yield 12 Feb (%)

BAE Systems

573

566

1.2

13.1

12.9

3.9

4.0

British American Tobacco

5,018

4,465

11.0

16.2

14.0

4.0

4.5

GlaxoSmithKline

1,323

1,293

2.3

12.3

12.0

6.0

6.2

HSBC Holdings

767

732

4.6

13.9

13.3

5.2

5.3

National Grid

875

749

14.4

14.5

12.4

5.3

6.2

Rio Tinto

3,942

3,896

1.2

12.7

12.0

4.7

5.1

Royal Dutch Shell

2,509

2,307

8.1

15.8

13.7

5.6

5.9

Sage(LSE: SGE)

798

687

13.9

23.0

19.7

2.2

2.6

Tesco

209

202

3.3

16.5

15.2

2.3

2.4

Vodafone

235

202

14.0

24.8

20.9

5.7

6.5

AVERAGE

--

--

7.4

16.3

14.6

4.5

4.9

The first thing that catches my eye is the value of the group as a whole. A current average P/E of 14.6 is significantly cheaper than at 1 January when it was 16.3. In addition, there's a good deal more dividend bang for your buck with a yield of 4.9% compared with 4.5% at the start of the year.

Furthermore, today's value looks even better relative to a post-financial-crisis high P/E of 17.3 and yield of 4% in my October 2016 review. And I have to go back over two years to January 2016 to find the group on a more attractive valuation than today. As such, I'd be happy to buy a slice of all 10 of these blue-chip businesses, if I were looking to establish a starter portfolio right now.

Double-digit fallers

At the individual company level, it's perhaps worth highlighting those whose shares have fallen by double-digits since January: namely, British American Tobacco (11%), Sage (13.9%), Vodafone (14%) and National Grid (14.4%).

I've been surprised by the extent to which investor sentiment has turned against National Grid. Not only by the drop in the shares since January but also by a near-40% fall from their all-time high in 2016. Sure, the Labour Party has been shouting louder about nationalisation, but the trade-off for the uncertainty is a P/E and yield at levels not seen since 2011.

Meanwhile, the only news of substance released by British American Tobacco this year was positive -- an anticipated 6% benefit to earnings per share from US tax cuts -- so the fall in the shares makes no sense to me.

And a trading update from Vodafone was perhaps a little weaker than expected but management reiterated full-year guidance on free cash flow, which supports the monster dividend.

The value of wisdom

Sage is another company that has released an update since 1 January -- and has seen a double-digit fall in its shares. Management said trading was in line with its expectations, but did also point to exchange rate headwinds from strengthened sterling.

This software and services giant was only brought into the portfolio to represent the technology sector in 2016, following the £24bn takeover of chip designer ARM by Japan's Softbank. Tech companies tend to trade on above-average P/Es and I consider Sage to be good value at any multiple up to 20.

I previously highlighted the stock in January last year at 655p (P/E 20) and the following quarter at 631p (P/E 18.6). The recent fall in the shares to 687p has brought the P/E back under 20 for the first time since.

While I'd be happy to buy all 10 featured stocks for a starter portfolio today, which, if any of them have made the cut for the five best blue-chip businesses identified by the experts at The Motley Fool?

You can discover the answer and read their analysis of all five companies in this exclusive FREE report. It comes with no obligation, so CLICK HERE now for your free copy.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings, Royal Dutch Shell B, and Sage Group. 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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