Five Myths of Investing in Blue-Chip ASX Stocks

  • Dec 04, 2019 AEDT
  • Team Kalkine
Five Myths of Investing in Blue-Chip ASX Stocks

Blue-chip companies command a brand presence which is widely appreciated in the concerned jurisdiction and maybe internationally. These companies include leading names from the industry and are considered as the stalwarts. Blue-Chip ASX Stocks are relatively safe, profitable, and long-lasting ones.

Investment in blue chips stocks is said to be less volatile relatively. Blue-chip term has been used to define such stocks in relation to the value these stocks offer to the investors. In poker, the blue chips are the ones carrying the highest value among all. Similarly, such with relatively higher value are called blue-chip stocks in stock market terminology.

Usually, these companies report steady earnings with less fluctuations. It is also believed that blue-chip companies have the tendency to operate steadily with near consistent results amid an economic recession in any country.

Five Myths of Investing in Blue-Chip ASX Stocks

1. Mature & No Growth

Investors often believe that the blue-chip companies have reached their highest potential, and there might be no more room for growth. However, in a dynamic market environment with ever-changing consumer preferences; there could be cases when blue-chip companies could deliver additional growth in pursuit of opportunities created by changing consumer preference.

For an example, the media & entertainment industry has seen the disruptions by on-demand video streaming apps, and social media. As the advertising market share of conventional players has been captured by new-age companies. However, the conventional players are launching similar services to tackle the disruption, meaning an open area to pursue additional growth for traditional companies.

The digitally abled financial services companies have been offering services similar to traditional banks. However, the traditional banking companies could also follow a similar route in capturing the digitally enabled market backed by large investment and capabilities.

Moreover, blue-chip ASX stocks have the ability to take part in an ongoing disruption in any industry with much greater capabilities, including investment, human capital, expertise, knowledge etc.

Domestically, the acquisition of lithium producer Kidman Resources Limited by Wesfarmers Limited (ASX: WES) could be an example as well.

2. Large Blue-chip companies are Safe

Predicting stock market is not the viable thing an investor shall do, while controlling his own behaviour would be the better thing to do. The risks to any company’s going concern are prevalent in all the periods time. However, the likelihood of these risks primarily impacting the going concern appears to be lesser in most of the times.

In dealing with large companies, an investor should consider that such companies are more prone to macro-economic shocks due to their relative size and dependency on a broad-based factor rather than factors concerning the small portion of a market.

For example – a decrease in birth rates for a large domestic infant formula producer is not a favourable macro picture. The fate of Nokia after the release of new-age mobiles, and its inability to cope with the changing consumer preference led to the downfall of a highly traditional mobile phone player.

3. Blue-chips will pay Regular Dividends

The dividend paying capability of the company is not decided by the stock being a blue-chip stock. However, it is decided by its profits, cash-flows, net assets, residual and retained earnings, and some legal test that companies need to follow prior to the declaration of a dividend.

When blue-chip companies are running slower than usual due to certain economic shocks, industry shocks or structural problems; it would impact the cash generating capabilities, profits of the company, and in turn, the company might face hard time in meeting its obligations related to debt servicing, payables etc.

In cases, when the secured debt obligations are not met by any company, it could even trigger a bankruptcy by the creditors of the company. Dividends are paid by relatively higher cash generating businesses with lesser capital outgo on expenditure. Moreover, a company with relatively less capital outflow might pay dividends, but this could not be a guarantee.

4. Blue-Chip Stocks have low Debt

Mostly, blue-chip companies tend to have very minimal or no debt in its balance sheet. However, there are some blue-chip companies that may have large debt piles due to the size of their operations, investment, expenses etc.

With the cost of acquiring/servicing debt getting lower, the high-quality credit profiles of the blue chips allow these companies to fetch the debt capital at much lower rates compared to their peers.

Therefore, it appears that the cost of acquiring debt for blue-chip companies is much lower, convenient, and economic. And maybe, this drives the blue-chip companies to consider debt funding over other source of funding.

5. Blue-chips cannot outperform Small-Caps, Mid-Caps

Isn’t it the case that all the companies be it small-cap or mid-cap are contending to become a large-cap company or blue-chip company? Yes, it is indeed the case that each company intends to grow and become a large company, and in doing so, the company passes through the phases of small-cap to mid-cap company.

Blue-Chip companies / Blue-Chip ASX Stocks have an elongated history of delivering stable results, and these companies have successfully passed the phases of being a small-cap company and mid-company.


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