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All Contents © 2019The Kiplinger Washington Editors
By Lawrence Meyers
| April 26, 2017
My concept of blue-chip stocks is very different from that of most investors.
I think when most investors’ minds wander to blue-chip stocks, the old fogies come to mind — legacy Big Pharma and telecom companies, beverage behemoths and consumer staples giants. I also think calling these stocks “blue chips” does a disservice to investors, though.
Most of these companies are well past their heyday. Most are low- to no-growth companies that pay out meager dividends. While you shouldn’t necessarily expect breakneck growth from extremely large companies, you also shouldn’t settle for kibble.
I typically view blue-chip stocks as companies that continue to grow earnings at 8% annually or more, have tons of free cash flow, lots of cash on hand, and still are future-looking — not backward-looking.
With that in mind, here are seven blue-chip stocks that deserve a spot in every long-term diversified portfolio.
Prices and data are from the original InvestorPlace story published on April 24, 2017. Click on ticker-symbol links in each slide for current prices and more.
I want to start out with a stock that doesn’t get much play in lists of blue-chip stocks: Cardinal Health, Inc. (CAH). It’s not small by any means, at $22 billion in market cap — it’s just not a first-to-mind name when it comes to big, no-doubt stocks.
That doesn’t mean this healthcare stock doesn’t belong.
I like Cardinal Health because it deals in distribution, not manufacturing. Distribution is where the money is. Corporations similar to CAH have both footprint and infrastructure, and therefore can get their healthcare supplies to where they need to go for maximum profitability.
Hence the reason I love distribution. Quality control isn’t an issue. It’s just about using an established network to get items where they need to go when they need to be there. And with a 24,000-pharmacy network to distribute to, CAH has plenty of customers. Besides all forms of drugs, it also takes care of logistics, managing inventory and so on.
Cardinal Health has been growing at 10% annually on average, and is expected to do the same over the next five years. I also love that CAH generated more than $2.4 billion in free cash flow last year, and only uses 20% of operating cash flow to pay its 2.5%-yielding dividend.
Now, let’s move on to a blue-chip stock that typically makes every list of blue-chip stocks to buy: Apple Inc. (AAPL).
Apple is the premier name in blue-chip stocks. The company has almost $250 billion in cash and investments. You can grouse about most of it being parked overseas, but even if Apple never gets a big repatriation holiday courtesy of President Donald Trump, that’s still plenty of ammunition once taxes are taken out.
Although Apple still generates the majority (60%-plus) of its revenues from its iPhone, and that is a concern, I get the feeling that shareholders are content with what Tim Cook is doing as a game manager. Maybe it’s the fact that AAPL is up nearly 25% year-to-date. Maybe it’s the fact that Apple is near all-time highs.
I’d like to see more vision, but Apple stock has so much margin of safety that if you plan to own it for a long time, you’ll do fine — and you’ll do even better if Congress lowers the corporate tax rate to 15%.
swong95765 via Flickr (Modified)
There are certain brands and companies — and even entire sectors — that are so intrinsic to human life that it’s foolish not to invest in that arena.
In this case, oil still is a slam dunk.
Yes, alternative energy continues to creep forward, but oil remains king, and will for decades to come. And yes, the oil market is always going to be volatile, but that’s exactly why big producers like Chevron Corporation (CVX) are the place to be. They have the scale and cash flow to maintain flexibility and survive even the worst of times.
Frankly, any of the big energy stocks are fine, but for now, I like Chevron’s upside better than the others. It’s loaded with cash, it has been wise with its capex spending, and it survived the oil downturn without having to touch its dividend (which, by the way, yields more than 4% right now).
The past couple years haven’t exactly been fun, but CVX has survived. Now, it’s poised to recover anytime oil prices do.
Microsoft Corporation (MSFT) is another mainstay of blue-chip stock lists, and it truly does belong there.
That’s because it offers safety — Microsoft sits on a cash hoard of some $130 billion, and has insanely consistent free cash flow of $25 billion annually. It can even afford to pay out half of that as a dividend.
And under Satya Nadella, the company also fits my criterion of growing at 8% or more. MSFT is astoundingly “growthy” right now — something many analysts didn’t think was possible just a few short years ago.
The Nadella-led Microsoft now has vision once more. It’s not exactly the high-flying story it was in the 1990s, but it doesn’t have to be to make you money. All it has to do is execute — and it is.
I also wonder what MSFT can still do with all that cash. As the $26.5 billion acquisition of LinkedIn shows, surprise mega-acquisitions are not out of the picture.
It takes something special to be considered a “blue-chip stock” without delivering a cent of income, but Alphabet Inc. (GOOGL) fits the bill.
You cannot argue its dominance in the search engine advertising game, and I simply don’t think that’s going to change. While the company is in a bit of hot water with advertisers over showing their ads next to “questionable” content, that’s a short-term problem that Google’s engineers will be able to solve sooner rather than later.
Meanwhile, GOOGL sits on more than $90 billion in cash and investments, and generated $25 billion in free cash flow last year.
I do wish Alphabet would rely less on its life as a digital billboard and more on nurturing its venture capital investments. That’s simply because I would prefer more diversification. But for now, the cash gives it plenty of flexibility and safety, and makes GOOGL a long-term hold from where I sit.
I think every long-term diversified portfolio should have some sort of insurance holding in it.
The entire concept of insurance would not work if, historically, claim payouts exceeded premiums. Yes, that’s the reason I believe the Affordable Care Act (aka Obamacare) is failing. But outside of health insurance, underwriting risk in virtually every situation has long been whittled down to a science.
That’s why I like insurance, and that’s why I’ve chosen the famous Dividend Aristocrat, Cincinnati Financial Corporation (CINF).
CINF has been a very successful investment, and continues to generate plenty of cash flow for investors. It has a respectful dividend (2.8%), has returns on par with (or beating) the S&P 500, and should have clear sailing for some time to come.
And who knows? Perhaps Obamacare will implode, and companies like Cincinnati Financial can add competitive health insurance products to its roster.
Richard Stephenson via Flickr (Modified)
Lastly, I want to recommend Walt Disney Co. (DIS).
Yes, that Disney — the one that’s struggling at the moment because ESPN is shedding subscribers at a brisk pace. In fact, next month, the division plans on axing more than 40 on-air personalities to help save on costs.
Worse, ESPN hasn’t been able to get out of its own way, insisting on alienating viewers by permitting political commentary from its analysts. Sports is supposed to be free of this nonsense, in my opinion, and CEO Robert Iger needs to clamp down.
Otherwise, DIS is kicking butt in everything else, especially with the purchase of Pixar Studios, Marvel Studios and LucasFilm over the past several years. This has set Disney up for generations of content based on multiple existing franchises — not just movies, but television, and of course the trickle-down effect into its theme parks and merchandise. This will carry Disney stock well into the next decade and possibly beyond.
Disney is the premier entertainment play in the stock market, and easily one of the top blue-chip stocks you should own.
This article is from Lawrence Meyers of InvestorPlace. As of this writing, he was long DIS.