Thinking about new investments opportunities for your portfolio in 2018?
Now that we constantly read about disruption and its implication for large established companies, selecting the right blue chips to buy warrants a cautious approach.
One only needs to look at how the Dow Jones components of decades gone by has since evolved to see that identifying large blue chips that you know will be thriving in the long term is not necessarily easy.
Let’s dive in!
What Are The Best Blue Chip Stocks To Buy In 2018?
Here is a list of five blue chip stocks that I think stand a good chance of performing well over the longer term, and are worthy of further research.
This year has proved a strong year for investors generally and bargains can be hard to come by. But the nature of blue chips mean if you select the right ones they can be bought with confidence during periods of weakness. The stocks below have a history of bouncing back when being placed under adversity.
Johnson & Johnson (NYSE:JNJ)
Many associate Johnson & Johnson with their well-known consumer brands that have been around as long as we can remember.
Strong Business Growth
The consumer division is still of major importance, but some may be surprised to the extent the fortunes of the company are now tied to the prospects of their exposures to the pharmaceutical and medical devices markets. As you can see from one of the recent company presentation slides below, stronger growth is occurring in the two latter divisions mentioned.
Almost half the company’s sales come from outside of the US now. Also, more than a quarter of sales coming from countries outside of the US & Europe.
As time passes the market may place more emphasis on the better growth areas as evident in its international and pharmaceutical sales trends of late. Upside potential in the share price is underpinned by the company’s diverse pipeline of existing and potential new drugs.
Promising P/E ratio
Forward earnings estimates over the next couple of years indicate the P/E ratio can fall comfortably below 20 and is not too prohibitive. When making this comment, I consider that the defensive nature of the earnings mix is something that many investors are willing to pay up for.
2017 – Johnson & Johnson (JNJ)
Whilst growth in the consumer area of the business could be considered mature, it does provide some modest stable growth and diversification. These are features that may not be so fashionable now but would be sought after if the global economy entered more turbulent times.
Solid earnings growth in recent years has left the dividend payout ratio quite conservative, which can also act as a buffer for the share price during a down market.
Microsoft Corporation (NASDAQ:MSFT)
The strong performance of Microsoft shares in recent years has led to some investors questioning the current high P/E ratio, yet the high earnings visibility and likely growth over the next few years means the stock may be able to justify the high expectations.
The bright growth prospects are more likely to come from the Productivity & Business Processes and Intelligent Cloud areas. We can observe this has been the case from the slide in the recent quarterly results. Note though that the acquisition of LinkedIn has contributed much of the rise in revenue in the Business division, but notwithstanding this, we can still see that these areas are outpacing growth in the PC business.
LinkedIn was a bold play from Microsoft, but CEO Satya Nadella seems to be making every post a winner since he took over. We have seen technology investments criticised before because investors do not look far enough out and appreciate the structural change in an industry, so I wouldn’t be surprised if this turns out to be another win for Microsoft.
2017 – Microsoft Corporation (MSFT)
The most important growth drivers for Microsoft are catering to business demand, think of Office 365 and Azure, where we are seeing positive signs come through on multiple fronts. There is encouraging evidence that not only are volumes growing well, but margins are improving in the key growth areas, and that recurring subscription revenue is also tracking well. Their reputation has improved, and many businesses will now see the brand the default choice.
The lower growth PC business has more modest expectations, but I don’t mind some exposure to products such as gaming and other devices, where some of the product range is conservatively priced.
Exxon Mobil Corporation (NYSE:XOM)
Exxon Mobil solidified its reputation as a blue chip by displaying resilience throughout a rocky time during 2014 & 2015 as many peers in the energy sector suffered enormously.
The attractiveness of owning a giant like this is that during turmoil in its sector, smaller competitors can struggle to ride out the storm and the benefits may be twofold. Survival can suddenly become the main game for many in the sector, which can present acquisition opportunities for the majors. It also puts a brake on many producer’s expansion plans, meaning overall production forecasts get cut and potentially paving the way for higher oil prices again.
We should keep in mind though that it is the diversity of Exxon Mobil’s operations that helped them manage to still increase their already high dividends throughout such a tough period for the energy sector.
Downstream and Chemical earnings still accounted for more than half of the group’s Q3 profit numbers, and this diversity was a key for Exxon Mobil riding out the tough times better than many competitors a few years ago.
2017 – Exxon Mobil Corporation (XOM)
Now things are looking brighter, debt levels and free cash flow is on the improve, and shareholder distributions remain a key focus for the company. The below slide from their latest Q3 earnings call offers a bright outlook as to the level of dividends going forward.
The historical P/E ratio has looked high in recent times, but this is not unusual when a commodity stock bounces back. On a forward earnings basis, we should be reasonably confident that it should be on a multiple of less than 20, a solid way to play a continued recovery in the oil price.
The Home Depot, Inc (NYSE:HD)
Finding investments in the retail sector now is so unfashionable given the Amazon threat, that it might well work in isolated cases.
We may see fund managers soon turn back to the sector, searching for retailers that are proving their resilience to this structural shift online. Home Depot is a blue chip exhibiting the required characteristics to buck the trend.
Strong Online Growth
They are investing in providing a great customer experience online, with online sales growing 19% in the last quarter. Nearly half of online sales are picked up in the store, and overall foot traffic in their stores have still grown and to date are not showing any meaningful concerns from the online threat.
They have built up a great reputation in servicing the professional customer, with this segment growing strongly. Millennials are also a key target, with an increasing number of them beginning to spend more on renovations, and the company is optimistic they will continue to embrace DIY.
These themes are assisting the company in their endeavor to achieve operating margins above 14% in 2018.
2017 – The Home Depot, Inc (HD)
Residential spending has significant room for a further pickup, and this is backed up by data suggesting the nation’s housing stock is aging considerably.
The main risk would be that eventually, Fed tightening impacts the sector, but good blue chips are renowned for bouncing back. Whenever Home Depot shares have suffered when the cycle turns in the past, they have bounced back to boast excellent returns for shareholders over the longer term.
S&P Global Inc. (NYSE:SPGI)
S&P Global is probably most well-known as the provider of its credit rating services, and this is still the most important driver of profits for the group.
During the global recession in 2008 at times this division was much maligned. This area has since recovered and in recent years has seen some robust growth in corporate issuance, which has underpinned a healthy part of the company’s earnings.
Whilst this trend may be hard to forecast in the future, we do know that a strong pipeline of maturities exists going forward. Should the overall yield curve remain low and credit spreads relatively benign, this should augur well for plenty of refinancing. The ratings services dating back over 150 years is an example of a strong economic moat, and this is also a characteristic among their other two key divisions.
S&P Dow Jones indices have a history going back over 120 years, and this division is well poised to continue to ride what looks to be a largely structural shift in the market towards index ETFs. Typically, many would associate this growth with that tied to vanilla ETFs tracking the S&P500, but the company has proved itself as a leading innovator of products across a range of asset classes.
Reputation and Market Understanding
When an attractive index or ETF is developed there is a strong first mover advantage. Investors want to track themselves versus an index that is widely used for comparative purposes, and ETF investors are attracted to products with scale that allow a competitive fee structure.
2017 – S&P Global Inc (SPGI)
The market and commodities intelligence division benefit from customers that want to be associated with systems that are characterized by superior risk management, analytical capabilities, and transparency. Such themes are discussed in a recent presentation from the company below, along with other secular trends that should provide impetus to future earnings.
These tailwinds and the wide moat the company enjoys means that a forward P/E of around 20 may not necessarily be expensive at all, despite the shares already having a strong 2017.