Blue-chip stocks: Value versus Growth in Covid-19 Era

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Blue-chip stocks: Value versus Growth in Covid-19 Era

 Blue-chip stocks: Value versus Growth in Covid-19 Era


  • Blue-chip stocks popularly perceived to be safe haven investments, feature stable earnings history, growth prospects, uninterrupted dividend payments and large market cap.
  • COVID-19 has created a make-or-break situation for an array of stocks and various stocks have either trembled to strike back or have outshined with their performance by leveraging their strong financial health.
  • Dividend payout is either deferred or lowered by various companies due to COVID-19. Investors during such times need to balance their portfolio between growth stocks and value stocks.
  • Growth stocks such as A2M and APT have climbed up the ladder of growth at a rabbit’s pace with the rapid expansion and substantial growth. On the other hand, value stocks emerging during the times of distress with their lower P/E ratio, and a strong balance sheet have grabbed the attention of investors.

Blue chip is the term coming from the game of poker where blue chips hold the highest value.

Australia has a diverse market with a mix of investors trading different stocks, falling in various baskets such as penny stocks, small-caps to large caps, growth-value stocks. With the outburst of COVID-19, the stock performance graphs across the globe began taking a beat and ended up in grief for many listed stocks, hooking the investor between a rock and a hard place. During the time of economic turmoil, safe-haven blue-chip stocks had a positive perspective.

Despite the fact that blue chip companies are fundamentally strong with a good history of financial, long term income recurring projects and faith of shareholders, there are no businesses that are immune to this virus induced business visibility destruction.

An investor has to decide which stocks to invest in during this economic turmoil, should they be growth stocks or value stocks? Approaching a diverse portfolio allocation both in terms of individual stocks and themes would help the investor wade through the current challenges.

The investor’s decision is affected by the key elements such as business and their future prospects. Investors are keenly tracking the business updates on COVID-19 to gauge the impact on the business viability and take actions accordingly to protect their investment portfolio.

Globally a select few stocks are in favour among investors even during the COVID-19 lockdown phase. One such group of stocks is the FAANG stocks. These stocks typically fit the ‘growth stock’ category.

The FAANG stocks are growing. Recently, Facebook launched its Facebook shops to aid the small businesses and enter the virtual marketplace. Apple Inc. (NASDAQ: AAPL) shares closed at US$333.46 on 8 June 2020, up by 0.59% from its last close, signalling a positive sign of optimism for the smartphone industry to combat COVID-19.

Closer home, the Australian WAAAX stocks have been the primary movers of the Australian technology sector. These stocks have boosted the confidence of the investors with their past performance as well as strong technology outlook for 2020.

On the other hand, value stocks from the proven blue-chip basket are also seeing investors’ interest. Some of the major blue chip value stocks with a strong market footing along with a well-balanced product offering tend to recover swiftly with the proven profitable business model, ploughing back of profits into the business for expansion can boost the investor confidence in blue chips.

Let us enrich ourselves with the growth stocks, APT and A2M along with the Value stocks BHP and WSC.

The a2 Milk Company Limited (ASX:A2M), a nutritional dairy entity in the infant formula industry witnessed a boosted revenue growth in the quarter ending 31 March 2020 (Q3 FY’20) in all key regions, particularly with infant nutrition products sold in Chinese and Australian market.

This growth in the revenue showcased the changing purchase behaviour of various consumers amid the coronavirus turmoil, as well as the increased pantry stocking of its products primarily via reseller channels and online channels assisting the revenue growth.

Also, the segment revenue from China, transacted in US dollars, noted a favourable impact due to significant depreciation of the New Zealand dollar to the US dollar during Q3 FY’20.

Although A2M is uncertain about the potential impact of COVID-19 on the supply chains and consumer demand in A2M’s core markets, A2M expects continuing revenue growth across its key regions with the assistance from the increased marketing investment in the US and Chinese markets. For FY’20, A2M is expecting revenue between NZ$1,700 million and NZ$1,750 million. And, The EBITDA margin is expected in the range of 31%- 32%.

This stock has appreciated by over 32 times in the past five years!

Source: ASX

Source: ASX

A2M was trading at AU$17.25 on 9 June 2020, up by 0.596% (at AEST 1:48 PM). The market cap of A2 Milk stands at AU$13.04 billion, and its P/E ratio was noted at 42.100x.

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Afterpay Limited (ASX:APT) is blooming, building on the growing popularity of the buy now pay later (BNPL), sector.

Lately, payment preferences and the mode of interaction have undergone a shift witnessed in shopping pattern which was earlier done via brick and mortar has now shifted to online marketplace, and payment preferences moving towards cashless transactions.

Source: RBA

Source: RBA

On 14 April 2020, APT reported its strong business performance for the quarter ending 31 March 2020 (Q3’20), with an increase of 105% on pcp in the underlying sales, standing at AU$7.3 billion. APT’s cash was noted at AU$541.1 million, as on 31 March.

On 21 May 2020, APT noted a robust business performance during Q3’20 and has a strong foothold across the US market as APT has crossed 5 million active customers in the US and ~9 million people joined the platform.

Source: APT report

Source: APT report

APT’s 5% stake was acquired by Tencent on 30 April 2020, aiding APT to equip its platform with the vast experience and network of Tencent, in the areas such as future payment options, technology, and geographic expansion.

On 9 June 2020, APT shares were trading down by 0.099% (at AEST 2:23 PM), at AU$50.56. APT’s market cap was recorded at AU$13.56 billion.

BHP Group Limited (ASX:BHP)

A globally recognised BHP Group has its headquarters in Australia and is engaged with the extraction and processing of minerals and oil & gas has provided its shareholders with growing dividends since 2016.

Let us have a look at the operational Highlights for nine months ended 31 March 2020:

  • BHP noted a strengthened financial position driven by its low-cost operations.
  • Solid underlying performance was noted throughout the portfolio that was offset by the impact of the strategic maintenance, natural field fall and wet weather condition in Australia. Group copper equivalent production broadly remained unaffected during the period.
  • Western Australia Iron Ore and Caval Ridge achieved record production. Production FY’20 guidance remained unaffected for petroleum, iron ore and metallurgical coal. However, energy coal production guidance is under review amid COVID-19.

BHP declared an interim dividend of US 65 cents for the half-year ending 31 December 2019. Dividend payment of US$3.3 billion as shareholder return was made on 24 March 2020. Since 2016, the total returns to shareholders in terms of share buy-backs and determination of the dividends was ~US$33 billion.

On 9 June 2020, BHP was trading at AU$37.86 with a market cap of AU$107.02 billion.

The Company has an annual dividend yield of 5.87% and a P/E ratio of 13.690x.

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Westpac Banking Corporation (ASX:WBC)

During the first half of FY’20 ending 31 March 2020, WBC reported a decreased net profit of AU$1,190 million, down by 62% pcp. WBC’s results remained weak backed by high impairment charges of AU$2,238 million, up to AU$1,905 inclusive of potential impacts of COVID-19, AUSTRAC provision as well as other notable items.

Source: Westpac Presentation

Source: Westpac Presentation

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However, the Company’s balance sheet stays strong with funding metrics comfortably above regulatory requirements. Its customer deposits were up at AU$19 billion, which was considerably higher than AU$5 billion loan growth.

WBC’s Initial Allowance is AU$17.9bn which can be drawn down until 30 September 2020. Also, WSP has raised AU$12.9 billion in new long-term wholesale funding.

Source: Company’s report

Source: Company’s report

Management decided to defer the interim dividend, but they will continue to review the dividend status over the course of the full year.

A strategic review for its various businesses is being conducted by the group to further optimise capital, designated under Specialist Businesses segments inclusive of Investments, Auto Finance, general insurance, superannuation Wealth Platforms, and WBC Pacific businesses.

On 9 June, WBC was trading at AU$19.99, up by 6.386% (at AEST 2:49 PM). WBC’s market cap was at AU$67.86 billion, its P/E ratio noted at 13.680x and has an annual dividend yield of 9.26%.


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