Top 10 blue-chip stocks in the UK
Investors often lean towards reputable and financially sound companies when choosing stocks – commonly referred to as blue chips. Here, we’ll 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 financially-sound companies. Blue chip companies 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 invest in 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, it means they're able to offset any weakness in one market with the strength in another, so they can often 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 companies using share buybacks from time to time.
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 invest and trade blue-chip stocks
You can choose to either invest in a stock or trade it. When you invest, you own the underlying shares in the company outright and are entitled to any dividends that are paid, and make a profit if the share price appreciates. Shares can be bought using a share dealing account.
Read more: Trading vs investing: what’s the difference?
Trading a stock enables you to speculate on the future share price movement of a stock, whether you believe it will fall (in which case you’d go short) or rise (in which case you’d go long). You would not own the underlying shares and won’t receive any dividends, but you can use leverage. This can be done using the steps below:
- Create or log in to your share dealing or trading account
- Research the company you want to take a position on
- Carry out technical and fundamental analysis
- Set your stops and limits
- Open and monitor your position
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 25 November 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.
AstraZeneca (£109.1 billion)
First on the list is AstraZeneca, a pharmaceutical giant that primarily concentrates on treatments for oncological, respiratory and cardiovascular diseases such as cancer, chronic obstructive pulmonary disease (COPD) and heart problems.
The company has shot up to the largest company on the FTSE 100 in terms of market capitalisation since the Covid-19 pandemic and its efforts to create a vaccine. That said, while the US and Europe are huge markets for the company, emerging markets – including China – are its largest.
AstraZeneca has a progressive dividend policy, meaning it aims to grow it annually, although buybacks were put on the backburner several years ago.
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.
HSBC 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 it’ll also continue to buy back shares to offset the dilution that comes from its scrip dividend, whereby investors receive more shares in the bank in lieu of their dividend pay-outs.
GlaxoSmithKline (£69.9 billion)
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 alsoit has significant operates 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. GSK’s dividends have remained flat over the last five years and that is expected to remain the case for at least the immediate future.
Diageo (£69.0 billion)
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 pay-outs having been consistently raised for at least the last ten years. It has also supplemented this with billions in buybacks and it is planning to return £4.5 billion to shareholders from 2020 to 2022.
British American Tobacco (£63.7 billion)
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’, for example 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 pay-outs and share buyback programmes, and BAT is no exception.
Rio Tinto (£59.5 billion)
Rio Tinto is one of the biggest mining companies in the world, digging up a variety of commodities. The main one is iron ore – with $24.1 billion in gross revenue for 2019. Next on the list is aluminium at $10.3 billion, followed by copper and diamonds at $5.8 billion.
Rio Tinto is highly cash generative and its dividend has grown handsomely over the past four years while being generously complimented by special pay-outs. Like the oil giants, Rio Tinto and other major miners are impacted by the price of what they mine.
This means the company 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.
Unilever (£52.0 billion)
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 and 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. The company's dividend has been increasing over the past four years and it has also carried out substantial share buybacks.
Royal Dutch Shell (£51.0 billion)
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, with returns being boosted by 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 current market price of oil has a huge influence on Shell’s results and its share price.
BP (£49.5 billion)
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. BP 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 pay-out and supplement it with buybacks until at least the end of 2021. Again, the current oil price heavily influences BP’s earnings and share price.
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 are 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 buy back shares in the past.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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