Blue Chips… a term coined by former Dow Jones employee Oliver Gingold in 1923 and derived from the game of poker where blue amongst all other poker chips boasts the highest value.
In the financial world, blue-chip stocks are those well-renowned and profitable large companies/conglomerates that have an established reputation and a record of sound financial performance over the years. These companies have consistently delivered good shareholder returns and endured different market conditions. Generally, blue-chip companies boast high stock prices and rightly so, these companies are high-quality and are more often than not market leaders in their operating industries.
Important Parameters Used by Investors to Asses Blue-Chip Companies
With a strong market footing and mostly a well-balanced product offering, blue chips can be considered as stock market gems that rarely go bankrupt in a market turmoil such as the one going on right now. Even if the price of a blue-chip stock declines, it tends to recover swiftly relative to other companies. Furthermore, what underpins investors’ confidence in blue chips is that these companies have a proven business model with profits often used to pay dividends and also ploughed back into the business for expansion presenting a bright future outlook.
Most importantly, blue-chip companies are usually old, sometimes over 40 years, which gives them a competitive advantage due to a large market presence which is not easily surmountable by the relatively new companies.
How can one add blue chip stocks to one’s portfolio? Some of the popular investment approaches may include directly buying the shares of the company, options, buying CFDs (Contract for Difference) or futures, or binary options on the share of the company. Moreover, some of the big institutional funds are always keen to add blue chips to their basket, as blue-chip stock prices are not that volatile and tend to recover fast following a decline, as mentioned above.
One drawback of investing in blue-chip remains that, having already experienced their accelerated growth and expansion phase, these companies do not grow as fast as smaller ones. But in a nutshell, they do provide a safe harbour to put one’s money in irrespective of the economic cycle.
Globally, the COVID-19 pandemic has caused a market mayhem, as social distancing and worldwide lockdown cause supply chain disruptions, no cash flow and slackening revenues. The stock markets, as a result, have been experiencing extensive sell-off, and the only companies that are sure to bounce back are the well-established ones or those implementing appropriate austerity measures and managing their liquidity and cash flow keeping in mind a long-term view.
Overseas in the US, blue-chips such as the FAANG stocks including Facebook, Amazon, Apple, Netflix and Google, have proved to be lucrative investment opportunities even amidst the market slump and they have bounced well from a collective market drop over the last two months.
Good Read: ASX: Surviving COVID-19 Crash
Now, let’s skim through some of the ASX-listed blue-chip companies and how they have been performing amidst the market turbulence.
Sonic Healthcare Limited (ASX: SHL)
Sonic Healthcare Limited is a well-known medical diagnostics company, which provides a comprehensive range of pathology and diagnostic imaging services and related administrative services and facilities to medical practitioners, hospitals and their patients in Australia, New Zealand as well as other locations, globally.
With a market capitalisation of $ 11.9 billion, the SHL stock was inching upward by 1.597% on 17 April 2020 (AEST 11:49 AM), trading at $ 25.440. The Company has an annual dividend yield of 3.36% and in the last five days, SHL has delivered a return of 2.71%.
In March 2020, SHL had withdrawn its earnings guidance for FY20 amidst the level of uncertainty resulting from the COVID-19 pandemic. The Company’s trading results in the last 8.5 months have been consistent with its prescribed earnings guidance; however, as population in Sonic’s markets self-isolate or are quarantined, the Company foresees a potential for diagnostic testing volumes to be impacted in the short to medium term.
Treasury Wine Estates Limited (ASX: TWE)
Melbourne, Australia-based Treasury Wine Estates is a global winemaking and distribution business, which has recently released an update informing that following a strategic review of its portfolio, the Company is considering a demerger of the Penfolds business and associated assets into a separate company listed on the ASX by the end of calendar year 2021.
TWE added that it places immense importance to the wellbeing and safety of its team, partners and all family members worldwide during the ongoing challenging and unprecedented times.
Further, the Company informed that decision regarding Penfolds’ demerger also stems from a detailed assessment of TWE’s optimal strategy and business structure, and builds on its internal operating model, which is primarily focused on premiumisation and accelerating the unique focus on the Luxury versus Commercial portfolios, worldwide.
Concludingly, a demerger would drive higher value creation in the long-term by directing one team’s focus on the luxury Penfolds multi-country of origin portfolio (Australian, French and US sourced propositions) while a separate team will focus on accelerating the mix-shift towards Luxury in New TWE. It would also lower and alter the size of the Commercial portfolio in the right manner.
With a market cap of $ 7.65 billion and ~ 720.8 million shares outstanding, the TWE stock was trading at $10.490 on 17 April 2020 (AEST 12:00 PM), down 1.131% with ~ 2.55 million shares traded. TWE has generated a one-month positive return of 23.23%.
Wesfarmers Limited (ASX: WES)
Perth, Western Australia-headquartered Wesfarmers Limited (ASX: WES) is a conglomerate with business spanning across varying sectors including retail, coal mining, chemicals, fertilisers and industrial products and operations across Australia and New Zealand.
With a market capitalisation of ~ $ 42.54 billion and ~ 1.13 billion shares outstanding, the WES stock was trading on 17 April 2020 (AEST 12:05 PM0 at $ 38.510, up 2.639% with ~ 460,046 shares traded. The stock has generated a positive return of 4.66% in the last one month.
Recently, on 30 March 2020, the Group announced to have executed the sale of 5.2% of its issued equity interest in Coles Group Limited (ASX: COL) for total pre-tax proceeds of $ 1,060 million with the expectation of a pre-tax profit on sale of ~$ 130 million. Post the sale, Wesfarmers has retained an interest of 4.9% in Coles Group.
As government announced measures to contain the spread of COVID-19, Wesfarmers’ operations have been impacted in the following way:
- The federal and state government measures in Australia did not require closure of retail stores and all businesses in the Group are focussed on ensuring continued availability of products and services in a manner that minimises risks to team members and customers.
- In New Zealand, following the implementation of rather strict measures, Wesfarmers’ Kmart’s 25 New Zealand stores remain closed and Bunnings’ 53 locations in New Zealand are open to trade customers but closed to the general public.
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