Looking ahead 12 months and beyond, the big blue chip stocks are the ones to own for steady capital growth and income, according to analysts. They say proven performing companies have already shown they can weather a global financial crisis and this is why they will continue to appeal to investors in what may be challenging times ahead given Europe’s continuing sovereign debt woes. 

Two analysts have chosen AMP, BHP Billiton, Leighton Holdings, Westpac Bank, ANZ Bank and Woodside Petroleum as choice picks for 2011. These heavyweights particularly suit relatively small retail investors who want exposure to equities, but are unable, or aren’t interested in keeping up to speed with the daily sharemarket action.

Hamza Habib, of Patersons Securities, says AMP’s continuing acquisition of AXA Asia Pacific paints a bright outlook given its increasing exposure to the superannuation industry, “which has extremely strong growth forecasts moving forward”. Habib says a combined entity will have the biggest market share in retail superannuation at 23.6 per cent. It will also have 19.7 per cent of the retail managed funds industry, 19.6 per cent of the risk insurance market and 19 per cent of the retirement income market. He says AMP offers good growth prospects in response to a strong Australian dollar attracting foreign investment, and it’s a top portfolio stock offering a prospective 2011 dividend yield of 7 per cent, of which 65 per cent will be franked. “AMP’s share price has dropped to an attractive entry level based on its price/earnings ratio,” Habib says.

Continuing strong economic growth in China and India is good for BHP Billiton, with its diversified suite of world-class assets, which, Habib says, are strategically located to service the Asian region. Habib says: “One of the best qualities of BHP is its low cost operations and robust balance sheet.” BHP Billiton reported a NPAT (net profit after tax) of $A14.926 billion in full-year 2010, and Habib expects a 40 per cent increase in 2011 NPAT to $A20.8 billion. Commodities such as iron ore, copper, zinc, petroleum, coking coal and alumina make for an appealing investment case. “This diversification reduces risk to any one commodity and gives it an advantage in a commodity super cycle that we find ourselves in today,” Habib says. “Adding to the investment case is a fully- franked prospective 2011 dividend yield of 2.33 per cent and a buy-back program of its UK listed shares.”

Spreading risk and selective stock picking is the strategy to adopt in volatile markets. Like BHP Billiton’s diversity, an investor portfolio should also be diverse to counter a stock or sector falling out of favour. External factors, such as interest rates and currency movements, should be considered before buying, particularly if a stock or sector, such as retail, has a direct exposure.

Habib includes construction giant Leighton Holdings because of its ability to win big contracts despite the company reducing full-year 2011 NPAT guidance from $612 million to an operating NPAT of $510 million. The share price fell on this news, which Habib says provides a buying opportunity. He expects Leighton to win its “fair share” of work from planned investment in Australian mining and energy projects surging to $132 billion in October – up 21 per cent on six months ago. “Along with capital growth prospects, Leighton is a leader in its sector, offering a fully-franked prospective 2011 dividend yield above 4.5 per cent – a great incentive for a capital growth and income portfolio,” Habib says.

Apart from a being a leader in the retail and business banking sectors, Habib says Westpac generates strong earnings from its institutional and wealth management divisions, culminating in a full-year 2010 cash NPAT of $5.88 billion, a 26 per cent increase on the previous year. Habib says Westpac has a low PE ratio compared to its peers and is trading at a discount to the sector. The St George Bank acquisition brings greater market share and is generating increasing profits. “With current forecasts predicting strong growth for the wealth management sector, business banking and regional banking, Westpac seems to have the right mix at the right time and is available at the right place,” Habib says. “There’s significant capital growth opportunities in its current price. Additionally, it offers a fully-franked prospective 2011 dividend yield of 6.85 per cent.    

Richard Batt, of Shadforth Financial Group, says the financial sector, particularly the big four banks, have underperformed the ASX 200 index in recent times. Concerns about regulatory risk have weighed heavily on banking stocks, while resources stocks have thrived. However, Batt says a perception exists that the market isn’t pricing financial stocks appropriately and there’s potential for a turnaround in the sector. Batt likes ANZ Bank, saying the key factor differentiating it from the other majors is its long-term strategic expansion into Asia. “The acquisition of the Royal Bank of Scotland’s Asian assets sets ANZ apart as a real growth stock within the financial sector,” he says. “If it achieves its goal to become one of Australasia’s leading banks, long term investors will profit.” In the meantime, ANZ is offering a prospective 2011 dividend yield of 6.2 per cent. Cash NPAT for full-year 2010 was $5 billion, an increase of 33 per cent on the previous year.

Batt believes the energy sector offers strong potential upside during the next 12 months, with further projects coming on line and increasing investment flowing into the sector. Woodside Petroleum’s share price has been punished after Royal Dutch Shell sold a partial stake in Australia’s biggest listed oil and gas producer. Delays and cost blowouts on the Pluto project haven’t helped, but this provides an attractive entry point, according to Batt. “The primary earnings driver for Woodside going forward will be its LNG operations,” he says. “One of Woodside’s competitive advantages is its expertise in LNG construction as it’s built most of the LNG trains now available in Australia. The company has a first mover advantage in a growing sector, and LNG prices are moving towards parity with oil.”  




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BHP Billiton




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Woodside Petroleum






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