by Marc Bastow | August 28, 2013 6:30 am
Let’s say we’re having a conversation, and I mention I’ve decided to increase my holdings in “blue chip” stocks.
You’d probably nod your head in assent if I mentioned I was adding to Exxon Mobil (XOM[1]) or Johnson & Johnson (JNJ[2]).
But what if I said Apple (AAPL[3])? Or Google (GOOG[4])? Well, there we might have an issue.
That’s because while the definition of the term “blue chip” fluctuates from source to source, it’s historically thought of by many to refer to components of the Dow Jones Industrial Average. However, given how broadly outdated the Dow is anyway, the more commonsense definition would seem to be close to that given by institutions like Investopedia[5]:
“Stock of a large, well-established and financially sound company that has operated for many years. A blue-chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name. While dividend payments are not absolutely necessary for a stock to be considered a blue-chip, most blue-chips have a record of paying stable or rising dividends for years, if not decades. The term is believed to have been derived from poker, where blue chips are the most expensive chips.”
So if you haven’t already widened your arms to this broader definition, let’s try today by incorporating some new players you should feel perfectly comfortable calling a blue-chip stock:
Google: Google’s where you’d need to except the dividend, but otherwise, if it’s not a blue-chip stock, I don’t know what is. It’s nearly 20 years old at this point, and it’s revolutionized the search industry, if not the Internet as a whole. Google’s market cap is nearing $300 billion, it’s the No. 1 brand in its industry, and … heck, it’s a verb to many people. You don’t get more established than that.
Qualcomm: Since we’re talking about tech, let’s invite Qualcomm (QCOM[6]) to the blue-chip party, too. Qualcomm is nearly 30 years old and boasts a leading place in the mobile space — particularly in chip manufacturing for wireless technologies. QCOM sports a market cap of $115 billion, which is higher than Intel (INTC[7]), and its top- and bottom-line growth remains steady. Meanwhile, QCOM is paying a dividend of 25 cents quarterly that’s 10 times higher than it was when it instituted payouts in 2003.
W.W. Grainger: I’ve advocated for this 75-year-old distributor of pumps, tools and motors for some time now. The one area W.W. Grainger (GWW[8]) falls short in is being a household name, but you know the household names it distributes: Honda (HMC[9]) motors, Generac (GNRC[10]) shop generators, and Briggs & Stratton (BGG[11]) motors are among the 1 million products available. Plus, GWW has increased its annual dividend each year for the past 40 years[12], and it boasts a 15% compound annual dividend growth rate over the past decade. Sure, Grainger’s market cap of $17 billion is paltry compared to Google and Qualcomm, but it’s sure a lot better than …
Alcoa: If we’re making cases for inclusion, let’s also talk about exclusion. Alcoa (AA[13]) might qualify as a “blue chip” on the merit of being in the Dow Jones or being the world’s third-largest player in aluminum, but otherwise, there’s not much about AA that screams stability. The stock has been eroded by nearly 70% in the past decade as the global economy has stomped on many materials stocks and even sent a number into bankruptcy. And in 2009, Alcoa’s dividend was cut from 17 cents to just 3 cents — the same place it rests today. Alcoa might have a long, illustrious history, but that’s about all it has.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long XOM, JNJ and AAPL.
Source URL: https://investorplace.com/2013/08/blue-chips-in-question-jnj-xom-msft-aapl-aa/
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