Blue chip shares are considered to be amongst the safer stocks trading on the Australian stock market.
They are large companies. They are diversified. They have been in business for many years. They have strong competitive advantages. They pay dividends, often fully franked dividends.
When you think ASX blue chip shares, names like Commonwealth Bank of Australia (ASX:CBA) and Westpac Banking Corp (ASX:WBC) probably spring to mind. Others include Telstra Corporation Ltd (ASX:TLS). Woolworths Group Ltd (ASX:WOW). BHP Billiton Limited (ASX:BHP).
Yet, look below the surface, and many of these traditional blue chip shares are struggling. It’s time to look for a new breed of ASX blue chip shares.
Not the banks
The big four banks, including Commonwealth Bank and Westpac, are struggling to grow their earnings. The banking royal commission is shining an unwelcome spotlight onto some of their more questionable business practices, including the CBA charging a dead customer for financial advice.
All this has been reflected in poorly performing share prices over the past 12 months, with the CBA share price falling 17% and the Westpac share price losing 19%.
It’s hardly the types of returns you’d expect from blue chip shares. And worse maybe ahead. I’m on record as saying the big four banks have substantial downside risk.
The Telstra share price has been taken to the cleaners these past 12 months, falling almost 27%. The company has cut its dividend and has multiple challenges ahead in a NBN world where it competes on price alone, and where competitors are eating away at its market share in mobile as they improve coverage and lower prices.
The Woolworths share price is up less than 2% over the past 12 months. For a blue chip share, that’s barely a pass, especially as its fully franked dividend yield is a relatively modest 3.4%.
Looking ahead, Woolworths supermarket sales growth will likely be around 3% per annum. Given the already elevated valuation of the Woolworths share price (22x earnings), the Woolworths share price is unlikely to go anywhere fast in the years ahead.
In contrast to the above companies, the BHP Billiton share price has had a strong 12 months, climbing almost 29% higher. Rising commodity prices, lower costs, management focus and co-ordinated global growth have given the BHP share price a nice tailwind.
As to the future, it’s anyone’s guess, given it’s impossible to predict with any certainty what will happen to commodity prices.
The new breed – tomorrow’s blue chip shares
Tomorrow’s blue chips should be large and growing. They should have strong competitive advantages, and long growth runways ahead. They’ll likely pay dividends, but you won’t buy them for their dividend yield alone.
With these shares, because their valuations generally reflect their future growth prospects, expect more volatility.
But don’t mistake volatility for risk.
Risk is defined as the permanent loss of capital. Telstra shareholders will know what that feels like, as will just about anyone who has dabbled in highly speculative mining stocks.
Volatility is the price of entry to stock market investing. It’s also why you, as a stock market investor, have the opportunity to generate outsized returns, over time.
As an investor, time is your ultimate competitive advantage. Buy a diversified portfolio of great companies, paying fair prices. Hold them for years, through the inevitable ups and downs of the stock market. Let compounding returns be your friend.
The longer your holding period, the more your risk is mitigated.
Within reason, the more diversified your portfolio, the more your risk is mitigated.
You should look to put together a portfolio of between 15 to 30 stocks, across a number of different industries. A portfolio of four banks and two supermarkets is not diversified.
5 ASX blue chip shares for 2018 and beyond
With the caveat that five stocks is not enough for a diversified portfolio, as you look to build out your diversified portfolio, these 5 blue chips might be a good starting point. They are all members of the S&P/ASX 200 Index, and all have billions of dollars in sales.
CSL Limited (ASX:CSL) – recent share price $171.05
CSL is a leading global biotech company that helps develop and deliver innovative biotherapies and influenza vaccines that save lives, and help people with life-threatening medical conditions live full lives.
CSL has robust demand for its differentiated products, and market leadership positions around the world, positioning it well for sustainable growth in the years ahead.
Macquarie Group Ltd (ASX:MQG) – recent share price $106.92
Macquarie is global provider of banking, financial, advisory, investment and fund management services.
It differs from the big four banks in that it has a global footprint, and its profits are derived more from its fund management business than traditional banking. In a steady economic environment, funds management is attractive because much of its revenue is recurring in nature.
Resmed Inc (ASX:RMD) – recent share price $12.98
Resmed sells devices that help with sleep-disordered breathing. Think snoring. It sells a range of products in approximately 100 countries. The company is large, growing at double digits, and has a long growth runway ahead.
Aristocrat Leisure Limited (ASX:ALL) – recent share price $27.00
Aristocrat is a leading global provider of gaming solutions, its products and services being available in over 90 countries around the world. Think electronic poker machines. In recent times Aristocrat has diversified into online social gaming and real money wager markets, unregulated markets with high levels of recurring revenue.
Treasury Wine Estates Ltd (ASX:TWE) – recent share price $18.84
Treasury Wine Estates is a global wine company with an international portfolio of wine brands that include Penfolds, Lindemans, Wolf Blass and Rosemount Estate. Under new management, the company has been transformed in recent years, growing quickly as it penetrated into the lucrative USA and China markets. Its brand names, distribution and quality of wines gives TWE a strong competitive advantage.