Saturday, February 21, 2009

Blue Chip Stocks

What stocks are in fact Blue Chip Stocks? I searched the internet but did not find a list of blue chips.

Let's first define attributes that a blue chip should have.

1. They should have a minimum market capitalization. I will say a minimum of $4 billion dollars.
2. They should have a history of increased sales and earnings going back at least 20 years. It can be somewhat difficult to find financial information for more than 10 years though but not completely impossible. Earnings growth should be significantly greater than the inflation rate.
3. They should have a sound balance sheet with a long term debt/equity ratio no greater than 0.50
4. They should pay a dividend although this could be argued perhaps passionately.
5. Return on equity of at least 15%

One important fact that needs to be stated is that a blue chip stock does not necessarily remain a blue chip stock. One such example would be U S Steel. For many years this company was one of the top blue chips. Not any longer.

Now for my list of what I would consider to be blue chip stocks.

JNJ Johnson and Johnson has a consistent history of increased earnings, sales, and dividends.

BDX Becton Dickinson ditto my comments on JNJ.

WMT Walmart has a consistent history of increased earnings, sales, and dividends except for last year when it did not increase its dividend.

PG Procter & Gamble There are several problems with PG. One is that it has had a history of borrowing lots of money and its d/e has often exceeded 0.50. It has also had more than a couple of earnings stumbles. But it does meet the criteria currently.

NKE Nike is a consistent performer with steady sales and earning growth. It has only in the past few year begun to increase its dividend on an annual basis. The company has virtually no debt. We will have to see how the recession impacts NKE. It may not be too pretty.

KO Coca-Cola has not had so consistent an increase in earnings as the companies above. 1999 and 2000 were disappointing years for KO but it did increase its dividend even in those years.

SYK Stryker has been consistent for the past 8 years but it had stumble in 1999. It has also had problems with anti-competitive behavior.

MCD McDonalds had a couple of stumbles back in 2001 and 2002 and during those years its roe and roa were not too good, but the company did increase its dividend during both years and has performed like a blue chip since.

And acouple of smaller cap stocks:

EXPD Expeditors International has been a steady performer in earning, revenue, and dividends. We will have to see how well it does during this recession. It will be tough.

FDO Familiy Dollar Stores does not quite meet the $4.0 billion market cap criteria. In general it has been a steady performer. It is a steady raiser of its dividend and although its earnings trend has had a few minor bumps along the way and its roe has not been consistantly above 15%, the company nevertheless on average has performed at blue chip standards.

How about some stocks that are on their way to becoming blue chips?

GOOG Google is a company that might eventually make the list. It has not been around long enough to have a decent track record. It has been growing revenue at a steady and remarkable rate and appears to be putting newspapers out of business. Also importantly it has been increasing shareholder equity at a remarkable pace.

And how about a few stocks that fall just a little short of being blue chips?

MSFT Microsoft would be by most standards a blue chip company, but not by mine. They have had a habit of wasting shareholder value by repurchasing company stock. Equity per share has remained constant for the last 10 years, actually has declined during the last 5 years.

Just because a stock might be considered a blue chip does not necessarily mean that it is a good investment. But currently the above stocks are certainly better investments than they have been for many years.