What is a “Blue Chip Company”?
Blue chip stocks are usually high-quality, stable, and well-established companies that tend to be leaders in their respective sectors.
Such stocks are generally part of market indexes such as S&P 500, FTSE 100 and Nasdaq 100, among others. To be included in an index, blue chip stocks need to have a large market capitalization (the number of outstanding shares of a company multiplied by share price), typically over US$10 billion, in order to attain the status of a blue chip stock.
Though these stocks are viewed as relatively safe investments by investors, they tend to be expensive.
Examples of well renowned blue chip stocks include Apple, Coca Cola, Walt Disney and Johnson & Johnson. Apple, which is in the technology sector, is listed on the NASDAQ, while the other three stocks are listed on the New York Stock Exchange.
Key Learning Points
- Most blue chips have a long record of paying dividends to shareholders and often enhance their payouts.
- The business model of blue chip companies tends to be dependable, and they have a record of delivering good returns over the long term.
- These firms tend to have a reputation for stable growth and a proven track record of success.
- Blue chip stocks tend to be less volatile than other stocks. These stocks are highly liquid too i.e., since they are traded frequently on stock markets, investors can easily sell these stocks if they require cash and can purchase the same too.
- A notable feature of blue chip companies is that they tend to have strong balance sheets and are characterized by high return on equity (ROE) and return on assets (ROA), large market capitalization and stable debt to equity ratios.
Blue Chip Stocks – Key Market Indicators
Stated below are some of the key market indicators of Apple Inc. (a blue chip stock), which is listed on NASDAQ in the US. One can obtain such indicators for other blue chip stocks across various sectors too. These indicators are used to evaluate stocks, make comparisons, and take prudent investment decisions.
These indicators are divided into seven sections – valuations, balance sheet, operating metrics, price history, dividends, margins and income statements.
Blue Chip Stocks and Investments
Blue chip stocks are not usually those that grab headlines in the financial press and tend to be low risk, low return investments in the short-term.
However, if investors have a long term investment horizon and can hold stocks through market cycles (ups and downs), then blue chip stocks tend to be sound investments and generally make money for shareholders in the long term.
Since blue chip stocks tend to be relatively expensive compared to other stocks, and are usually associated with low short term returns, they are often preferred investments for conservative investors, high net worth individuals and retired people (for whom safety of capital is very important).
Investors who wish to make money quickly or in the short-term find the short-term returns of blue chip stocks unattractive and prefer to invest in other riskier stocks.
As blue chip stocks tend to be low risk and low return investments in the short-term, they often make up just one part of an investor’s portfolio. One could based on one’s risk appetite, invest in a group of higher risk and higher return mid-cap and small-cap stocks, while including blue chip stocks at the core of a portfolio.