Investors often use Dow Jones Industrial Average (^DJI 0.81%) membership as a proxy for blue-chip status. According to Dow Jones, "A stock typically is added to The Dow only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors."
But Dow membership is no guarantee of future success.
So which Dow members are the best blue chips? Investors on the lookout for stability and the prospect of attractive returns should keep an eye out for:
- Healthy, consistent earnings growth
- High returns on capital
- Reasonable valuation or yield
So I ranked all 30 Dow stocks on these metrics to get a few ideas for further research. These were the top five:
|
Company |
10-Year Annualized Earnings Growth |
Worst Earnings Year (2003-2012) |
Return on Capital |
Dividend Yield |
Total "Blue Chip Score" |
|---|---|---|---|---|---|
|
McDonald's (MCD 0.45%) |
22% |
-16% (2007) |
19% |
3.3% |
345/400 |
|
Microsoft (MSFT 1.66%) |
14% |
-26% (2012) |
19% |
3.4% |
314/400 |
|
IBM (IBM 1.43%) |
14% |
10% (2012) |
26% |
2% |
293/400 |
|
Intel (INTC 0.07%) |
13% |
-39% (2006) |
12% |
3.9% |
265/400 |
|
Nike (NYSE: NKE) |
15% |
-19% (2009) |
25% |
1.1% |
255/400 |
Source: S&P Capital IQ. All earnings are on a per-share basis.
McDonald's efficient, global supply chain helps drive incredible margins for the restaurant industry. Overall earnings-per-share growth may have stalled somewhat in the past year, but international growth remains strong and same-store sales growth seems to be returning. The stock, at 17 times earnings, trades at a reasonably tasty valuation, too.
I'm a bit more skeptical of Microsoft than I am of the other names that made the cut. The software giant has struggled to expand into growth areas like Internet and mobile, and it's not obvious to me what advantages it might have that would allow it to keep up with the newest breed of tech giants. That said, its core business and entertainment divisions have remained strong.
IBM's high-margin services and consulting business have helped to make it a profitable and entrenched player. It continues to invest in so-called "big data" capabilities that many believe will develop into a critical tech field.
Intel's utter dominance in PC microprocessors gives it tremendous scale. So far, it hasn't been able to break into the growing mobile market. That's a big risk, but if it's able to find a way in, mobile could turn out to be a huge opportunity. Like IBM, Intel was ranked among the best overall companies in America.
Nike recently reported strong earnings. One of the newest Dow members, the athletic giant continues to chug along, sporting decent sales growth and better margins.
