Blue Chip stocks are not just for risk-averse investors, although most market commentators cite “safety” as one of the principal attractions of the stocks. The safety comes from the rock-solid financial stability of most blue-chip stocks and decades of solid performance.
Dividend payments are another reason for the attractiveness of blue-chip stocks in Australia. Although there is no precise definition of a blue-chip stock, dividends are acknowledged as the 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 recognisable to investors and the general public. Putting all those factors together suggests blue chips can withstand downturns in the larger economy or their respective business sectors.
Here are some of the best ASX blue-chip and large-cap stocks to buy in 2023.
Top Australian Brokers
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 the 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 2018, Rio sold its last remaining coal mine, leaving the company as the world’s only global miner to fully exit the coal space. The company has been on a path toward carbon neutrality and has entered the renewable energy space since shedding its coal assets; it 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- presently on hold.
Rio’s principal asset remains iron ore. However, the company is committed to producing “green steel” by reducing carbon emissions at its mines by converting to renewable energy sources, primarily wind and solar.
The company also mines copper and aluminium – commodities of vital importance for a clean energy future – as well as titanium dioxide, a coating that can reduce carbon emissions – and borates for agricultural and high-tech applications. Rio is the majority shareholder of Energy Resources Australia (ERA). Rio recently announced the company would buy AUD $319m dollars in ERA shares to help fund the rehabilitation of the site of ERA’s Ranger Uranium Mine.
Rio Tinto Financials
Source: ASX Website
The company attributed the lacklustre financial performance for FY 2022 to lower commodity pricing, higher costs for input materials and energy, and inflationary pressures on operating costs across the board. Revenues fell 13%, while net profit after tax (NPAT) declined 41%.
Half Year 2023 results continued to be impacted by lower commodity prices, with net cash from operating activities down 33% and net profit after tax down 43%.
The company has been a prolific dividend payer over time, but it cut the dividend for the year by 38%.
Analysts are still largely bullish on RIO, led by global investment banking behemoth Goldman Sachs. Overall, one analyst has STRONG BUY recommendations, seven have BUY recommendations, and four 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.
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 and symptomatic diagnosis from a medical practitioner.
Sonic Healthcare may not meet the Australian blue-chip stock “household name” qualifying standard. Still, 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 complete medical imaging services available in 120 clinics across Australia. It provides X-rays and Ultrasounds, Magnetic Resonance Imaging (MRI), Computerised Topography (CT), 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 dipped 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
The full brunt of the Covid impact began to appear in the half Year 2023 Financials released on 16 February, with total revenue dropping 14%, led by a 72% drop in COVID-related revenue – and a 54% drop in NPAT (net profit after tax). Surprisingly, investors focused on a table in the report that compared the first half of FY 2023 to the pre-Covid first half of FY 2020, when total revenues were up 22%, and NPAT was up 50%.
The company continues to grow by acquisition, with the latest coming on 2 April as Sonic announced the acquisition of the large German group of pathology centres, the Diagnosticum Group.
The analyst community remains somewhat mixed on Sonic, with two BUY recommendations, three HOLDS, three UNDERPERFORMS, and one SELL as of the end of September. In the positive camp, Citi on 6 March upgraded SHL to a BUY rating and raised the price target to $36.00 per share, focusing on the Half Year Financials as evidence the company can return to form.
The share price got a significant boost following the Half Year Results and remained in an upward trend until the release of the full-year results in August.
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 Montreal, Canada.
Under normal conditions, toll road operators should act as reliable defensive stocks as travel remains relatively constant even in tough economic times. The working-from-home 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 so rare that normal economic models can’t predict them).
The net profit reported in FY 2021 was attributed to discontinued operations. Half Year 2023 Financial Results showed marked improvements. Revenues rose from AUD $1,056bn dollars to $1,436, while net profit rebounded from a loss of $106m dollars to a profit of $55m dollars. The company also reported record traffic volume, hitting 2.5 million trips in November 2022.
Full Year 2023 results showed revenues increasing by 26.2% while net profit rose from $16min FY 2022 (excluding one-offs) to $92m.
Transurban has been a consistent dividend payer over the last decade, maintaining dividends during COVID. The share price is down 7.8% year to date.
QBE Insurance Group Limited (ASX: QBE)
QBE Insurance claims it is a “household name” in Australia. The company is among the world’s top 25 insurers and reinsurers and is Australia’s largest general insurance company.
QBE is international in scope, serving consumers 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 pandemic, revenues rose throughout, and net profit in FY 2021 and FY 2022 exceeded the reported net profit in the pre-pandemic year 2019. The improving trend continued into the Full Year 2023.
Over five years, the share price is up 40.8%. The company maintained dividend payments except for eliminating an interim payment in FY 2021.
Analyst opinion is somewhat mixed on the stock with two STRONG BUYS, five BUYS, four HOLDS and four UNDERPERFORMS.
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 and investment management services to the consumer and commercial markets.
The company’s financials have fully recovered from the impact of COVID-19, with net profit in FY 2023 nearly doubling pre-pandemic levels.
Insurance Australia Group Financials
The company’s Half Year 2023 Financial Results, released in mid-February 2023, supported the bullish case for IAG that the recovery was well underway. NPAT went up from the Half Year 2022 result of AUD $173m dollars to $468m, an increase of 170.5%. In addition, IAG reported adding 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%.
The distinction between blue-chip and large-cap stocks generally comes down to dividend payments. Blue chip stocks have a solid record of paying dividends over time, going back at least a decade in most cases. IAG meets that standard.
Blue chip stocks in Australia have a gold-plated reputation in the 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.
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.