In uncertain times like these, many investors are attracted to the stability and reliability of blue-chip stocks.
But lots of investors mistake signs like a company's size, prominence, age, and the length of its dividend history for stability. While these are all features of a blue-chip aura, they don't necessarily indicate safety, stability, and growth.
So what do the numbers tell us are the 10 best blue-chip stocks, and what characteristics do they share?
- Competitive advantages: These are capabilities and market positions that keep competitors or would-be competitors at bay. Huge profitability is the hallmark of a company with great competitive advantage; when there's nothing to protect you from competitors, they enter the fray and drive down profitability. To identify reliable companies with competitive advantages, I looked at returns on assets and operating margins and made sure that the companies on my list were profitable every year for at least five years.
- Fortitude: One of the distinguishing features of today's difficult economy is lack of demand and spending power to buy the stuff companies make and do. For consumers, that's what's driving (and being driven by) the high unemployment rate. For companies, weak demand means poor sales. I wanted to find companies that were able to grow sales significantly over the past year despite these challenges.
- Dividend stability: Over long periods of time, a stable and growing dividend adds considerable heft to an already profitable investment. I ruled out stocks that cut their dividend at any point over the last decade and took into account how fast companies' dividends grew over that time period.
Since profitability and sales growth can vary considerably by industry, I ranked companies by these metrics within their sectors, and used the highest-ranked company from each sector. Drum roll please...
5-Year Average Return on Assets
1-Year Revenue Growth
10-Year Dividend Growth
|Consumer discretionary||McDonald's (NYSE: MCD )||13%||30%||8%||27%|
|Consumer staples||PepsiCo (NYSE: PEP )||12%||17%||22%||13%|
|Energy||Apache (NYSE: APA )||11%||49%||40%||21%|
|Financials||T. Rowe Price (Nasdaq: TROW )||19%||46%||21%||15%|
|Healthcare||Stryker (NYSE: SYK )||12%||25%||11%||33%|
|Industrials||Precision Castparts (NYSE: PCP )||14%||24%||17%||10%|
|Information technology||Intel (Nasdaq: INTC )||12%||34%||18%||27%|
|Materials||Nucor (NYSE: NUE )||10%||5%||29%||25%|
|Telecommunications||CenturyLink (NYSE: CTL )||6%||24%||32%||31%|
|Utilities||Exelon (NYSE: EXC )||6%||24%||12%||12%|
Source: S&P Capital IQ.
This is a pretty impressive list of names. We're all familiar with McDonald's and Pepsi, which are the sixth and 22nd strongest brands in the world, respectively. Those two, along with a number of other names on the list, enjoy advantages of scale that increase efficiency or allow them to get favorable prices from customers and suppliers.
Precision Castparts, with its technical know-how in building jet parts, and Nucor, which helped pioneer the "mini" steel mill, are low-cost producers in their industries. With over half a trillion dollars under management, T. Rowe Price benefits from the significant economies of scale in the money management industry (it takes a similar number of analysts to manage $1 billion as it does $1 million). Intel is so enormous that it can spend more than twice as much on R&D and capital expenditures as its chief competitor collects in sales without breaking a sweat.
Stryker has an enormous share of the worldwide hip- and knee-replacement markets. CenturyLink was one of only two telecoms that was even eligible, but it beat AT&T in every category (though its return on assets declined significantly this year after its most recent acquisition). Apache and Exelon are major players in attractive fields -- natural gas and nuclear energy production -- and have been ramping up their investments considerably.
While none of these blue chips look outrageously expensive, remember that the price you pay for their stocks affects your returns, too. Always make sure you're paying a cheap or a fair price before pulling the trigger.
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