Blue Chip stocks are not just for risk averse investors, although most market commentators cite “safety” as one of the principal attractions of Blue Chips. The safety comes from the rock solid financial stability of most blue chip stocks, along with decades long track records of solid performance.
Dividend payments are another major reason for the attraction of blue chip stocks. Although there is no precise definition of a blue chip stock, dividends are acknowledged as one factor that differentiates a blue chip from a large cap stock.
A history of consistent dividend payments reinforces the financial stability of a company that continues to share company earnings with investors.
Many blue chip companies are market leaders in the sectors in which they operate with the products and services they provide instantly recognizable to both the investing and the general public. Putting all those factors together suggests blue chips can withstand downturns in the larger economy or in their respective business sectors.
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Here then are some of the best ASX blue chip and large cap stocks to buy.
- Rio Tinto Limited (ASX: RIO)
- Sonic Healthcare Limited (ASX: SHL)
- Transurban Group (ASX: TCL)
- QBE Insurance Group Limited (ASX: QBE)
- Insurance Australia Group (IAG)
Rio Tinto Limited (ASX: RIO)
It should come as no surprise that some of the best ASX blue chip stocks in today’s market are mining companies. The UK and Australian joint listed Rio Tinto may be the best of breed, not so much because it is one of several diversified ASX blue chip mining stocks, but because of the range of commodities RIO counts among its operational assets.
On 28 May of 2018 Rio sold its last remaining coal mine, leaving the company as the world’s only global miner having fully exited the coal space. The company has been on a path towards carbon neutrality and has entered the renewable energy space since shedding its coal assets and now counts lithium among its mined commodities. Rio has two lithium projects in development – the Rincon Lithium Project in Argentina and the Jadar Project in Serbia, on hold at the moment.
Rio’s principal asset remains iron ore, but the company is committed to producing “green steel” by reducing carbon emissions at its mine by converting to renewable energy generating sources, primarily wind and solar.
The company also mines copper and aluminum – both commodities of vital importance for a clean energy future – as well as titanium dioxide, a coating that can reduce carbon emissions – and borates for both agricultural and high-tech applications. Rio is the majority shareholder of Energy Resources Australia (ERA). Rio recently announced the company would buy $319 AUD million dollars in ERA shares to help fund the rehabilitation of ERA’s Ranger Uranium Mine site.
Rio Tinto Financials
Source: ASX Website | 24 May 2024
Volatility in commodity prices continued in FY 2023, driving down Rio’s net profit after tax by 19% with revenues declining 2.7%. Higher costs on input materials and energy along with inflationary pressures on operating costs across the board also impacted on the results.
The company has been a prolific dividend payer over time but did cut the FY 2022 dividend payment of AUD$6.86 per share to $3.93 per share. Rio’s five-year average dividend yield is 6.02%Analysts are still largely bullish on RIO, led by global investment banking behemoth Goldman Sachs. The Wall Street Journal has an analyst consensus rating of OVERWEIGHT, with four of the seven analysts reporting at BUY, two at OVERWEIGHT, and one at HOLD.
It is debatable how much of a household name RIO is, but on every other measure the company goes beyond large cap into blue chip stock status. Over five years the stock price is up 38.9% in volatile trading. Year over year the stock price is up 21.1%, as of 24 May of 2024.
Source: ASX Website: 24 May 2024
Sonic Healthcare Limited (ASX: SHL)
From bruises to bone cancer, the treatment of medical ailments begins with a diagnosis, from sample tests conducted in a pathology laboratory, to medical imaging, to symptomatic diagnosis from a medical practitioner.
Sonic Healthcare may not meet the Australian blue chip stock “household name” qualifying standard, but the company is one of the largest providers of laboratory and diagnostic imaging worldwide and an Australian leader in medical imaging and general and occupational health treatment centres.
The company serves medical practitioners, hospitals, and community health centres with its full line of medical imaging services available in 120 clinics across Australia, from X-rays and Ultrasounds to Magnetic Resonance Imaging (MRI) to Computerised Topography (CT) to mammography and nuclear medicine.
The COVID 19 Pandemic was a “double edged sword” for the company, with some operations benefiting from Covid testing and others suffering from the shutdown of a wide range of non-life threatening medical procedures. The impact was slight, with a drop in net profit between FY 2019 and FY 2020. By 2022 Sonic’s financials fully recovered but took a drop in FY 2023. The company saw an 80% dip in revenue from COVID related diagnostics; an 11% revenue decline overall, and a 53% drop in net profit.
Sonic Healthcare Financials
Source: ASX Website 24 May 2024
Half Year 2024 results continued the pattern with revenues falling 15% and net profit down 47%, attributed largely to a 90% fall in COVID related revenues.
The full brunt of the Covid impact began to appear in the Half Year 2023 Financials, with total revenue dropping 14%, led by a 72% drop in Covid related revenue – and a 54% drop in NPAT (net profit after tax.) Sonic susrprisntly increased its dividend payment in FY 2022 and FY 2023, from $1.00 per share to $1.05 per share. The five-year average dividend yield is 2.79%. On 20 May the company downgraded its guidance, sending the already declining share price further downward. Year over year the share price is down 29.8% Trading at 52-week lows, Sonic shares may be at an attractive entry point, given the company’s position in the rapidly expanding healthcare sector.
Source: ASX Website 24 MY 2024
The Wall Street Journal has an analyst consensus HOLD rating on Sonic shares, with five of the sixteen analysts reporting at BUY, one at OVERWEIGHT, six at HOLD, two at UNDERWEIGHT, and two at SELL.
Transurban Group (ASX: TCL)
Transurban is one of the world’s largest toll road operators. The company designs, builds, and operates toll roads in Sydney, Melbourne and Brisbane in Australia, in the Greater Washington DC area in the United States and in Montreal Canada.
Under normal conditions, toll road operators should function as reliable defensive stocks as travel remains relatively constant even in tough economic times. The stay-at-home work environment and lockdowns were highly abnormal.
The company’s financial performance over the last three fiscal years reflects the impact of a veritable “black swan” event on Transurban. (A black swan event is an occurrence so rare it is impossible for normal economic models to predict them.)
Transurban Financials
Source: ASX 24 May 2024
The net profit reported in FY 2021 was attributed to discontinued operations. Half Year 2023 Financial Results showed marked improvements. Revenues rose from $1,056 AUD billion dollars to $1,436 while net profit rebounded from a loss of $106 million dollars to a profit of $55 million dollars. The company reported record traffic volume as well, hitting 2.5 million trips in November of 2022.
Full Year 2023 results showed revenues increasing by 26.2% while net profit rose from $16 million in FY 2022 (excluding one offs) to $92 million. Half Year 2024 results showed revenues increasing from $1.43 billion dollars to $1.48 billion with net profit quadrupling, from $55 million to 230 million. Dividend payments rose 13.7%.
Transurban has been a consistent dividend payer over the last decade, maintaining dividends during COVID. TCL’s five-year dividend yield average is 3.3%.
The share price is down 13.1% year over year.
Source: ASX 24 May 2024
The Wall Street Journal has a consensus HOLD rating on TCL shares, with one analyst at BUY, one at OVERWEIGHT, twelve at HOLD, and one at SELL.
QBE Insurance Group Limited (ASX: QBE)
QBE Insurance claims it is a “household name” in Australia. The company is among the top 25 insurers and reinsurers on the planet and the largest general insurance company here in Australia.
QBE is international in scope serving consumer and commercial customers in Australia, the Asia Pacific, North America, Asia, Europe, and the UK. QBE has been in business since 1886.
Although QBE’s profit dipped substantially in FY 2020 during the Covid pandemic, revenues rose throughout and net profit in both FY 2021 and FY 2022 exceeded reported net profit in the pre-pandemic year of 2019. The improving trend continued into Full Year 2023.
QBE Financials
Source: ASX 24 May 2024
On 10 May the company released results for the first quarter of 2024, with a 2% increase in gross written premium and a 7.3% increase in renewal rates. Premiums declined 2% excluding rate increases.
The company maintained dividend payments during Covid with the exception of the elimination of an interim payment in FY 2021, although the current dividend payment of $0.29 per share still trails the pre-Covid payment of $0.37. The five-year average dividend yield is 1.79%.
Over a five-year period the share price is up %37.5%. Year over year the share price is up 19%, as of 24 May of 2024.
Source: ASX Website 24 May 2024
The Wall Street Journal has an analyst consensus rating of OVERWEIGHT on QBE shares with ten of the analysts reporting at BUY, two at OVERWEIGHT, two at HOLD, and one at UNDERWEIGHT.
Insurance Australia Group (IAG)
Insurance Australia is the largest general insurer serving Australia and New Zealand with multiple brands of insurance products. IAG has six brands in Australia and three in New Zealand. These branded companies offer general insurance products to the consumer and commercial markets as well as investment management services.
h The company’s financials have fully recovered from the impact of Covid, with net profit in FY 2023 nearly doubling pre-Covid levels.
Insurance Australia Group Financials
Source: ASX 24 May 2024
The company’s Half Year 2023 Financial Results, released in mid-February of 2023, supported the bullish case for IAG that the recovery was well underway. NPAT went up from the Half Year 2022 result of $173 AUD million dollars to $468 million, an increase of 170.5%. In addition, IAG reported the addition of 100,000 new direct customers across Australia and New Zealand during the Half Year. As evidence to support the view insurance companies are relatively inflation proof, IAG raised premiums during the period. Full Year 2023 Results showed net profit after tax up 140%.
Half Year 2024 results showed gross written premium up 12.5% while insurance profit was up 75.4% but profit attributable to shareholders fell 4%.
The distinction between blue chip and large cap stocks generally comes down to dividend payments. Blue chips have a solid track record of paying dividends over time, going back at least a decade in most cases.
IAG meets that standard, with uninterrupted dividend payments for the last decade and a five-year average dividend yield of 2.85%
Year over year the share price is up 24.1%, but over five years it has dropped 18.4%.
Source: ASX Website 24 May 2024
The Wall Street Journal has is reporting a HOLD rating on IAG shares, with three analysts at BUY, nine at HOLD, and one at UNDERWEIGHT.
Blue Chips have a gold-plated reputation in the Australian investment community, with the financial resources to withstand challenging economic conditions. Financial stability can be seen in a prospective blue chip’s historical record of financial performance. Share price performance over time shows appreciation. Products and services offered are consistently in demand and may be well-known to the non-investing public. The crown jewel of blue chip investing remains dividend payments.
Over time dividends can significantly increase the total return on investment, earning the best ASX blue chip stocks a place in an investment portfolio.
FAQs
What are Blue Chip Stocks?
A blue chip stock is the stock of a very large company with an excellent reputation and sound financials. Usually these companies have been in business for many years and have dependable earnings. These companies tend to have market caps in the billions of dollars and are one of the leading companies in their sector. Australian blue chip companies include Rio Tinto Limited, Insurance Australia Group and Westpac Bank Corporation
How do you Invest in Blue Chip Stocks?
You can buy blue chip stocks through a regulated broker. Blue chip stocks tend to be a safer investment that other types of stocks as the companies are, by definition, very large and have been operating successfully for many years. You should always do your own research before deciding to invest in blue chip stocks and always have a risk management plan in place.
Where Does the Name Blue Chip Stocks Come From?
The term blue chip stocks was coined in the 1920s by Oliver Gingold who worked for the Dow Jones. It is a reference to poker, where the blue chips had the highest value. It was originally used to describe high value stocks but these days it has more to do with a company’s history and reputation. For example Facebook (now called Meta) has a market cap of over $1 trillion, but is generally not considered a blue chip stock as it was only founded in 2004.
