Top 10 blue-chip stocks in the UK
Blue-chip stocks are renowned for their reputable and financially-sound businesses that often appeal to investors in good times and bad. We explain why people invest in them, and outline the top 10 blue chips in the UK.
What is a blue-chip stock?
Blue-chip stocks are the largest, most mature, reputable and most financially-sound companies. Blue chips are usually a leader within their given sector with an established track record. They are also included within a recognised index. For example, in the UK, companies that form part of the FTSE 100 – comprised of the 100 largest publicly-listed firms by market cap – are often referred to as ‘blue chips’. However, while all blue chips are large-caps, not all large-caps are blue chips, and the constituents of the FTSE 100 change on a quarterly basis (so the smallest of the top 100 changes frequently). Therefore, this article will focus on the largest and longest-standing blue-chip stocks in the UK.
Why do people trade blue-chip stocks?
Many blue chip stocks share several characteristics that appeal to investors. Their size and stature means they are better able to weather any economic downturns and able to offset any weakness in one market with the strength in another, meaning they can post resilient earnings in good times and bad. This is because they usually operate on an international level or have several different businesses. They often pay dividends and have a history of returning cash to shareholders, with many of the top blue chip stocks having sprayed investors by using share buybacks.
The stability and low-risk nature of blue chip stocks make them a favourite for pension funds and large financial institutions, meaning they offer the greatest liquidity.
How to trade blue chip stocks
Trading a stock allows you to speculate on the future share price movement of a stock, allowing you to take a position on whether you believe it will fall (going short) or will rise (going long). You do not own the underlying shares and won’t receive any dividends, but you can use leverage. This can be done using either an IG CFD account.
Top 10 blue-chip stocks in the UK
Below is a list of the top ten blue-chip stocks in the UK, based on the largest companies by market cap as of the end of January 2020. Most of them have been in the top 10 for years if not decades, making them sound bets for long-term investors. They mostly produce vital goods, such as oil or pharmaceuticals, or provide crucial services like banking, all of which are solid sectors to have exposure to in good times and bad.
Royal Dutch Shell
Royal Dutch Shell is one of the world’s largest publicly listed oil and gas producers in the world. The company is split into three revenue-generating divisions. The first is the production of oil and gas, known as ‘upstream’, while the second is refining those commodities into final products, known as ‘downstream’. The third is its integrated gas division that concentrates on producing the likes of Liquified Natural Gas (LNG) and biofuels. The company has a focus on gas because it sees it as a vital energy source as the world transitions to renewable energy. It significantly raised its exposure to gas when it bought BG Group in early 2016 for around £47 billion.
Shell has consistently been the largest company on the London Stock Exchange by market cap for several years and its dividend has remained steady for the last five years, and returns have been boosted with share buybacks. Shell has said increasing shareholder distributions is a ‘key feature’ of its strategy and has said it could return over $125 billion over 2021-2025.
As an oil stock, it is worth remembering that the oil price has a huge influence on Shell’s results and its share price.
HSBC is the largest bank in the world outside of China in terms of assets. The bank is headquartered in London, but its origins lie in Hong Kong and Asia remains a huge part of the business, which operates in 65 countries in total. In 2018, Asia accounted for just under half of all revenue but contributed the majority of profits, followed by Europe. It has over 40 million customers and provides banking services to individuals and businesses, as well as a swathe of financial services. Still, the bank used to be larger than it is today and has slimmed down over the past decade.
HSBC has said it intends to keep its dividend steady for the ‘foreseeable future’ but has said it will continue to buyback shares so it can offset the dilution that comes from its scrip dividend, whereby investors receive more shares in the bank in lieu of their dividend payouts.
Third on the list is AstraZeneca, a pharmaceutical giant that primarily concentrates on treatments for oncological, respiratory and cardiovascular diseases such as cancer, chronic obstructive pulmory disease (COPD) and heart problems. It sells over $21 billion worth of pharmaceuticals each year and while the US and Europe are huge markets for the company, emerging markets, including China, are its largest. Ten of its older, more established medicines account for almost two-thirds of all sales but it has three newer medicines – Tagrisso, Forxiga and Brilinta – that are delivering faster growth than the rest of the portfolio and now account for 15% of revenue.
AstraZeneca has a progressive dividend policy, meaning it aims to grow it annually, although buybacks were put on the backburner several years ago.
BP is the other big London-listed oil company. Like Shell, it has upstream and downstream operations concentrated on producing and refining oil and gas. It too has raised its exposure to gas in recent years, bolstered by the $10.5 billion acquisition of US shale assets from BHP Group in 2018. It also owns a substantial 19.75% stake in one of Russia’s biggest oil companies, Rosneft. It generates about five times as much revenue from its downstream operations compared to the upstream segment, although the latter generates considerably more profit for BP.
BP has been growing dividends and has committed to keep growing the payout and supplement it with buybacks until at least the end of 2021. Again, the oil price heavily influences BP’s earnings and its share price.
GlaxoSmithKline, also known as GSK, is another pharmaceutical giant. While it does have some overlap with its peer AstraZeneca, its portfolio of treatments is different. GSK also focuses on areas like COPD and asthma, but also in other areas like HIV. It also makes vaccines to defend against ailments like meningitis and shingles. Plus, following a deal with US peer Pfizer, it now has a Consumer Healthcare business that offers over-the-counter treatments covering everything from pain relief to digestive aides. The Consumer Healthcare division is the smallest but still contributes billions in revenue and is by far the fastest growing.
Dividends have remained flat over the last five years and that is expected to remain the case for the next couple of years.
British American Tobacco
British American Tobacco, better known as BAT, is the second largest tobacco company in the world, having risen through the ranks following its $49 billion takeover of US rival Reynolds American in early 2017, which added brands like Camel and Newport to its existing portfolio that contains the likes of Lucky Strike and Pall Mall. The deal meant BAT was one of the only major tobacco firms that had large exposure to both US and international markets, and the deal was also seen as beneficial considering the industry’s transition to ‘next generation products’, which in layman’s terms refers to stuff like vaping. Cigarette companies were long deemed to be running a business in decline as more people shun tobacco, but the emergence of vaping and other new products means the industry now has substantial growth avenues to pursue. BAT says it is a leader in introducing new ‘reduced-risk’ products for its customers, led by its Vype vaping product and its glo tobacco-heating product.
Tobacco companies are renowned for having some of the most generous dividend payouts and share buyback programmes, and BAT is no exception.
Diageo is a formidable force within the alcoholic drinks industry, boasting spirit and beer brands including Johnnie Walker, Smirnoff, Tanqueray and Guinness. Its geographical reach is vast and diverse: North America is its largest region accounting for 35% of net sales, followed by Europe & Turkey (23%), Asia Pacific (21%), Africa (12%) and Latin America (9%). It sells more scotch than anything else, with £1 in every £4 of revenue coming from the category, but its sales mix is otherwise diverse. Alcohol giants are often regarded as resilient businesses because people will choose to drink to celebrate good times and drown their sorrows during downturns, making the business solid regardless of the economic picture.
Diageo has become one of the most reliable dividend payers in the FTSE 100, with payouts having been consistently raised for at least the last ten years. It has also supplemented this with billions in buybacks and it currently plans to return £4.5 billion to shareholders between 2020 and 2022.
Rio Tinto is one of the biggest miners in the world, digging up a variety of commodities. The main one is iron ore as it generated over 70% of its total revenue from the metal in the first half of 2019 and almost 83% of earnings, with operations predominantly centred in Australia. The other commodities it mines includes aluminium, copper, diamonds, and energy minerals such as uranium. In total, it has around 60 projects based in 35 different countries.
Rio Tinto is highly cash generative and its dividend has grown handsomely over the past four years while being generously complimented by special payouts. Like the oil giants, Rio Tinto and other major miners are impacted by the price of what they mine, meaning it is vulnerable to movements in metal prices, particularly iron ore, as well as consumption in China – which is the main market for Australian-made commodities.
Every day, 2.5 billion people use products that are made by consumer goods giant Unilever. The company has a powerhouse portfolio of household brands spanning food and drink, home care, beauty and ingredients. These include everything from Cornetto ice creams to Cif cleaning spray to Dove shower cream. The breadth of the portfolio means Unilever is responsible for providing many day-to-day products for people around the world. Beauty and food products generate the majority of revenue, while Asia is its biggest market followed by the Americas and then Europe. Unilever is approaching the end of a three-year restructuring and is hoping to start leveraging the investments it has made.
Unilever’s dividend has been increasing over the past four years and it has carried out substantial share buybacks.
Last on the list is another consumer goods giant, Reckitt Benckiser. The company has a stricter focus than Unilever and concentrates on health and hygiene products, with leading brands such as Dettol, durex, Nurofen, Gaviscon and Cillit Bang under its belt. Again, many of its products are regarded as day-to-day essentials, and therefore popular regardless of the economic backdrop. Notably, developing markets account for around half of its revenue, with the other half broadly split between North America and Europe.
Reckitt’s dividend has stayed flat or grown annually every year since 2011 and has been known to buyback shares in the past.
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