The 10 Best Blue Chips Today

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...

Sector

Company

5-Year Average Return on Assets

Operating Margin

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.

If you're looking for reliable stocks in these uncertain times, consider the 10 tickers above along with the 13 names from a free report from The Motley Fool's expert analysts called "13 High-Yielding Stocks to Buy Today," which includes one named by a senior retail analyst as "the dividend play of a lifetime." Tens of thousands have requested access to this report, and today I invite you to download it at no cost to you. To get instant access to the names of these 13 high-yielders, simply click here -- it's free.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of T. Rowe Price Group and PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo, Stryker, Nucor, Exelon, Precision Castparts, Linear Technology, and McDonald's. Motley Fool newsletter services have recommended creating a write covered strangle position in Exelon. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 17, 2011, at 6:02 PM, Howard1ii wrote:

    I am a little surprised that your IT pick would be Intel versus an IBM. The chip business can be pretty unstable, and IBM seems much more diversified with SW, HW and services.

  • Report this Comment On October 17, 2011, at 7:07 PM, TMFDiogenes wrote:

    IBM's an excellent company -- they also came up pretty high on the rankings. While it's true the chip business can be cyclical and Intel's returns on assets were much more volatile, they tended to be quite a bit higher than IBM's -- even in lean years they were about in-line with IBM's. Also, its margins and revenue growth were higher, hence the higher ranking. But there's nothing wrong with IBM.

    Thanks for commenting!

    Ilan

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