Which of these 10 FTSE 100 monster shares would I buy today?

The UK’s blue-chip FTSE 100 index includes only 10 companies with market valuations exceeding £50bn. I keep a close eye on these so-called ‘mega-cap’ stocks, not least because they account for close to half of the wider index’s value. What’s more, I often hunt for value by looking for cheap shares among these very large, highly liquid stocks.

The FTSE 100’s 10 Goliaths

For the record, these are the 10 largest shares in the FTSE 100 index:

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Company Industry Share price (p) Market cap (£bn) PER* Earnings yield Dividend
Shell Energy 1,948.20 148.8 10.3 9.7% 3.4%
AstraZeneca Pharmaceuticals 9,155.74 142.1 1,585.1 0.1% 2.3%
HSBC Holdings Banking 549.60 111.6 13.4 7.5% 2.9%
Unilever Consumer goods 3,873.50 99.1 20.1 5.0% 3.8%
Rio Tinto Mining 5,698.00 94.8 6.7 14.9% 8.7%
Diageo Consumer goods 3,666.50 85.0 28.2 3.5% 2.0%
GlaxoSmithKline Pharmaceuticals 1,560.20 79.3 18.0 5.5% 5.1%
British American Tobacco Tobacco 3,382.16 77.6 11.6 8.6% 9.6%
BP Energy 389.65 76.2 14.1 7.1% 4.1%
Glencore Mining 419.05 55.4 15.3 6.5% 3.4%

*PER is price-to-earnings ratio (a stock’s earnings multiple)

I would not buy all 10 FTSE 100 shares

Together, the total market cap of these 10  Goliaths is close to £970bn. That’s almost half (48.5%) of the FTSE 100’s total market cap of £2trn. Thus, these 10 powerhouses have a major influence on the Footsie’s future growth and dividends.

However, if you asked me to create a portfolio based solely on these FTSE 100 giants, I’d politely decline. Why? First, because this hypothetical portfolio would be highly concentrated. Putting 10% into each stock would leave me with weightings of 20% in the energy, pharmaceuticals, mining, and consumer goods categories. Such a highly condensed portfolio would not provide me with enough diversification. In other words, it wouldn’t spread my risk about nearly enough for my liking.

Second, as a veteran value investor, several stocks on this list look far too pricey for my portfolio. I aim to buy shares that trade on low PERs and high earnings yields. Also, as an older investor, I like the passive income generated from owning shares paying juicy dividends. Ideally, I prefer dividend yields well above the FTSE 100’s 4% a year cash yield.

But I would buy Rio Tinto

Of all 10 mega-cap FTSE 100 stocks in the above table, one in particular stands out for me. It is mega-miner Rio Tinto (LSE: RIO), which means ‘red river’ in Spanish. Why do I like Rio Tinto today? First, it is a huge (£94.8bn) group with an easily understood business model. Rio digs up resources — commodities such as metals and minerals — to sell worldwide. It feeds vast quantities of iron ore, aluminium, copper, and lithium into the global economy. With 60 mining projects across 35 countries, this super-heavyweight generates huge cash flows, profits, and earnings.

Second, Rio Tinto’s shares look dirt-cheap to me at current levels. The Anglo-Australian firm’s stock trades on a lowly price-to-earnings ratio of 6.7 and a bumper earnings yield of 14.9%. Also, Rio’s dividend yield of 8.7% is almost five percentage points higher than the FTSE 100’s cash yield. Third, Rio is set to return many billions of pounds to shareholders this year in cash dividends and share buybacks. 

For me, this dirt-cheap dividend dynamo appears to be an outstanding buy today. But 35 years of investing experience has taught me that mining stocks can be extremely volatile. Also, during downturns in commodity cycles, miners’ shares often perform poorly. Nevertheless, I’d happily buy and hold this FTSE 100 behemoth at current share prices!

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Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended British American Tobacco, Diageo, GlaxoSmithKline, HSBC Holdings, and Unilever. 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.

This post was originally published on Motley Fool

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