Blue-chip stocks, those market-leading, large capitalization companies with strong brands, typically has long track records of earnings and cash flow growth. Investors see them as relatively safe equities investments, even when stocks come under pressure during economic contractions.
For those looking for a steady ride in 2021, today’s article introduces seven blue-chip stocks for consideration.
Due to their size, blue-chip businesses tend to benefit from economies of scale, have access to a broad range of resources and can invest in new technologies. Other key characteristics include leadership in their given industries, seasoned management team, diverse revenue streams, steady cash flow and earnings growth, and relatively long company history. Their solid balance sheets also enable them to have access to low-cost financing.
The term “blue-chip” comes from the game of poker, where blue-chips are the ones that are worth the most. Similarly, publicly listed blue-chip companies usually are among the most valuable in stock markets. They can typically weather economic crises with minimal losses both in terms of financial assets and brand value. They may continue to grow earnings and cash flow, even under challenging economic conditions. Therefore, they are usually among the favorite investments for long-term investors.
Most blue-chip companies are also steady dividend payers. Seasoned market participants believe that investing in blue-chip stocks with dividends is a cornerstone to building wealth over the long term. While the stock market has been red-hot, there are worthwhile deals on the Street, especially among blue-chip shares.
On our list today are the following seven blue-chip stocks to buy in 2021:
- BAE Systems (OTCMKTS:BAESY)
- Cisco Systems (NASDAQ:CSCO)
- Coca-Cola (NYSE:KO)
- CVS Health (NYSE:CVS)
- Home Depot (NYSE:HD)
- JPMorgan Chase (NYSE:JPM)
- Pfizer (NYSE:PFE)
Blue-chip stocks: BAE Systems (BAESY)
- 52-Week Range: $19.89 – $34.74
- Dividend Yield: 4.4%
Our first stock comes from the other side of the Atlantic. London-headquartered BAE Systems offers aerospace and defense (A&D) solutions globally. Many investors find the sector reliable as clients are typically national governments with rich defense budgets. Military contracts also tend to have long lives.
BAE Systems’ operations can be found 40 countries. The company employs around 90,000 people people worldwide. Governments of the U.S., U.K., Australia, continental European countries, Qatar and Saudi Arabia are its top customers.
Over the past year, BAESY stock is down about 10%. The current stock price supports a dividend yield of 4.41%, making the company particularly attractive to passive income seekers. BAE Systems released half-year results in late July, as well as a trading update in November.
Half-year revenue came at GBP 9.2 billion ($12.6 billion), an increase of 6% year-over-year (YoY). Operating profit was GBP 808 million ($1.1 billion), a decline of 10%. The group’s free cash flow guidance for the full year was GBP 800 million ($1.09 billion).
Management highlighted the importance of the U.S. operations and cited: “the Group’s U.S.-based portfolio remains well aligned to customer priorities and growth areas, which we expect to continue under the next administration … [The] backlog provides good visibility of growth in the U.S. business. The two-year budget deal enacted in 2019 established a defense spending level of c.$740 billion for fiscal year 2021.”
Furthermore, “In the UK, the government has recently re-stated its commitment to meeting the NATO target of spending of at least 2.0% of Gross Domestic Product on defence… Our business in Australia, where we are the leading defence contractor, is set to grow significantly in the coming years as the Hunter Class Frigate programme matures.”
BAESY stock’s forward price-to-earnings (P/E) and price-to-sales (P/S) ratios are 9.91 and 0.83, respectively. Long-term investors could find value at the current price level in this wide-moat global A&D group.
Cisco Systems (CSCO)
- 52-Week Range: $32.40 – $50.28
- Dividend Yield: 3.2%
Technology giant Cisco Systems is our second blue-chip company for today. It has been a global leader in developing technologies and hardware across networking, security, information technology (IT) and the cloud. Clients rely on Cisco to transport data, voice and video traffic. It is No. 63 on the Fortune 500 list.
Cisco reported first-quarter FY21 earnings in mid-November. Revenue was $11.9 billion and non-GAAP net income of $3.2 billion translated into 76 cents per share.
CEO Chuck Robbins commented,”Cisco is off to a solid start in fiscal 2021 and we are encouraged by the signs of improvement in our business as we continue to navigate the pandemic and other macro uncertainties.”
In recent quarters, the Street has been worried about the lack of growth in Cisco’s top line. And the stock price has reflected that concern. In 2020, CSCO stock was down about 7%. Put another way, I believe most of the negative sentiment has already been priced in the price.
Meanwhile, management has been transitioning Cisco from a hardware company to a software and cloud firm. Now, more than half of its revenue comes from software and services. And about 80% of that is subscription-based revenue, a trait that investors like.
CFO Kelly Kramer noted, “We continued to transform our business through more software offerings and subscriptions, driving 10% year over year growth in remaining performance obligations. We delivered strong growth in operating cash flow and returned $2.3 billion to shareholders.”
Many on the Street also believe the global 5G rollout will help change Cisco’s fortunes. Sales will likely go up, thanks to to 5G wireless and data center upgrades. Ultimately, I believe CSCO stock will benefit in the coming quarters.
CSCO stock’s forward P/E and price-to-book (P/B) ratios are 14.39 and 3.95, respectively. Most InvestorPlace readers would be familiar with the recent rallies as well as high valuations of many other tech names. The new year could well become the year Cisco shares play catch-up in price.
- 52-Week Range: $36.27 – $60.13
- Dividend Yield: 3.0%
Our next discussion is on the drinks giant Coca-Cola. Its beverages range from sparkling soft drinks to water, sports drinks, juice, dairy, plant-based beverages, tea, coffee and energy drinks. Thanks to its branding power, billions around the globe know of the company. It owns several of the leading non-alcoholic soft drink brands worldwide, including Coca-Cola, Diet Coke, Fanta and Sprite.
Coca-Cola released Q3 numbers in October. Net revenue came at $8.7 billion. However, revenue as well as operating revenue fell, 9% and 8%, respectively. Similarly, EPS also fell 33% to 40 cents. Cash from operations was $6.2 billion year-to-date, down 20%.
In short, results were weak compared to Q3 2019. As many restaurants and hospitality venues closed their doors in 2020, sales numbers declined considerably. The company relies on such establishments for people to buy many of Coca-Cola’s beverages.
Before the start of the pandemic, management had begun several restructuring initiatives, with the aim of growing revenues of stronger brands. Overall, the group wants to halve the the number of brands in its portfolio.
CEO James Quincey said in the quarterly statement, “We are accelerating our transformation that was already underway … While many challenges still lie ahead, our progress in the quarter gives me confidence we are on the right path.”
Forward P/E and P/S ratios for KO stock are $24.63 and $6.94, respectively. Last year meant challenges for Coca-Cola, the leader in non-alcoholic drinks. However, I believe its future growth potential remains intact.
CVS Health (CVS)
- 52-Week Range: $52.04 – $76.44
- Dividend Yield: 3.0%
I believe our next stock is a robust, long-term healthcare pick, namely CVS Health. It owns CVS Pharmacy, the largest pharmacy services in the U.S., with about 10,000 pharmacies and 1,100 Minute Clinic locations.
With its participation in the rollout of Covid-19 vaccines, CEO Larry Merlo believes CVS Pharmacy will be an important part of the slowing of the pandemic. Furthermore, winter also means the regular flu vaccine season, adding the group’s revenues.
The Q3 earnings results announced in November showed revenue of $67.1 billion, up 3.5% YoY. Growth in the Health Care Benefits and Retail/LTC segments helped those numbers. But adjusted earnings per share came at $1.66, compared to $1.84 a year ago. Net income was $1.22 billion, a decline of 20.3%.
On a more positive note, investors were pleased to see management increase the 2020 adjusted EPS guidance range to $7.35-$7.45 from $7.14-$7.27. CVS stock’s forward P/E and P/S ratios are 9.1 and 0.35, respectively, showing a relatively cheap valuation for the shares. Potential investors could consider buying the dips.
Home Depot (HD)
- 52-Week Range: $140.63 – $292.95
- Dividend Yield: 2.23%
As the world’s largest home improvement retailer, Home Depot needs little introduction. It has about 2,300 warehouse-format stores throughout the U.S., as well as in Puerto Rico, the U.S. Virgin Islands, Guam, Canada and Mexico.
In mid-November, Home Depot announced Q3 metrics. Sales came at $33.5 billion, up $6.3 billion, or 23.2%, form a year ago. Net earnings hit $3.4 billion, or $3.18 per diluted share. A year ago, the metrics had been $2.8 billion, or $2.53 per diluted share.
Before the start of the pandemic, management had started developing the e-commerce operations, which paid off significantly in 2020. Also, the group was designated as an essential retailer. Thus the retail stores have remained open during the lockdown weeks a year ago.
CEO Craig Menear commented, “The third quarter was another exceptional quarter for The Home Depot as we saw the continuation of outsized demand for home improvement projects, which has led to sales growth of more than $15 billion through the first nine months of the year.”
Last year, HD stock returned over 21%. Its forward P/E and P/S ratios are about 21.65 and 2.28, respectively. The company is expected to report earnings next on Feb. 23. As a result, there is likely to be increased volatility in the shares in the coming weeks.
Short-term profit-taking could depress Home Depot stock toward the $250 level, which would improve the margin of safety.
JPMorgan Chase (JPM)
- 52-Week Range: $76.91 – $140.76
- Dividend Yield: 2.8%
JPMorgan Chase is one of the leading global financial services firms with assets of over $3.2 trillion. Its operations cover investment banking, consumer financial services, commercial banking, financial transaction processing, as well as asset management.
In mid-October, JPMorgan Chase released Q3 results. Net revenue on a reported basis was $29.1 billion, almost unchanged compared to $29.3 billion a year ago. Net income was $9.4 billion, up 4% YoY. Earnings per share was $2.92, an increase of 9%. Investors were pleased to see that assets under management hit $2.6 trillion, or up 16% YoY. (Q4 earnings are due on Jan. 15.)
Jamie Dimon, chairman and CEO, commented: “…we maintained our credit reserves at $34 billion given significant economic uncertainty and a broad range of potential outcomes. We further strengthened our capital and liquidity position, increasing CET1 capital to $198 billion (13.0% CET1 ratio, up 60 basis points after paying the dividend) and liquidity sources to $1.3 trillion.”
JPM stock was down almost 5% last year, reflecting the general weakness in most financial shares. Its forward P/E and P/S ratios are 13.45 and 3.27, respectively. As I expect the stock to do better in 2021, I’d look to buy the dips.
- 52-Week Range: $26.43 – $43.08
- Dividend Yield: 4.24%
As one of the world’s premier biopharma giants, Pfizer has always been a highly regarded blue-chip company. The past year saw the vaccine developed by Pfizer and BioNTech (NASDAQ:BNTX) become one of the first Covid-19 vaccines approved by many countries globally.
At this point, it is not easy to know how much revenue the vaccine will bring to Pfizer. InvestorPlace’s Larry Ramer last month wrote it was unlikely to “move the needle much.” However, global citizens as well as the Street have been excited about the scientific and commercial success of both companies.
According to Q3 results, revenue was $12.1 billion, a drop of 4% YoY. Adjusted income of $4.1 billion reflected a decline of 3% YoY. Similarly, adjusted diluted EPS of 72 cents was also 3% lower than the previous year’s 75 cents.
CEO Dr. Albert Bourla cited, “I am more confident than ever in Pfizer’s future as we transition to a smaller, more agile, science-based pharmaceutical company with what we believe is an industry-leading innovative pipeline, a portion of which we were pleased to highlight at our recent investor day event.”
Over the past year, PFE stock was down 6%. Forward P/E and P/S ratios are 12.32 and 4.36, respectively. We believe PFE stock deserves to be on your radar screen as one of the leading blue-chips.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation and publishes educational content on investing.