Blue Chip Stocks

Blue chip stocks are big, well-established, dividend-paying corporations with strong business prospects. These are companies that also have sound management that should be able to  make the right moves to keep competing successfully in a changing marketplace.

The root of the term “blue chip” stems from the game of poker, as the blue chips represent the highest value. Investing in blue chip stocks can give you an additional measure of safety in today’s turbulent markets.

Pat McKeough believes investors will profit most, and with the least amount of risk, by putting the bulk of your stock portfolio in shares of blue chip companies—those that are well-established, with strong balance sheets and steady earnings and cash flow. These are companies that have bright prospects in healthy and growing industries.

The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. All these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above average-growth prospects in expanding markets.

Meanwhile, when investing in any type of stock, at TSI Network we recommend using our three-part Successful Investor strategy:

1-Invest mainly in well-established companies;
2-Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3-Downplay or avoid stocks in the broker/media limelight.

atco

Canadian Utilities helped its holding company, ATCO, more than double its profit in 2016 despite weaker revenue.

ATCO LTD. (Toronto symbols ACO.X [class I non-voting] and ACO.Y [class II voting]; www.atco.com) gets most of its earnings from its 52.8% stake in Canadian Utilities (Toronto symbol CU).

It also owns 75.5% of ATCO Structures & Logistics. That business makes temporary buildings for construction, mining and energy exploration firms; Canadian Utilities owns the other 24.5%. Thanks to Canadian Utilities’ strong performance, ATCO’s 2016 earnings jumped 120.8%, to $340 million from $154 million in 2015. Due to fewer shares outstanding, earnings per share gained 122.6%, to $2.96 from $1.33. If you exclude unusual items, earnings rose 22.9%.


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ATCO’s revenue for 2016 declined 2.1%, to $4.0 billion from $4.1 billion in 2015. That’s partly because the company sold some of its smaller businesses. Revenue from the Structures business (16% of the total) fell 25.5% after ATCO completed a major contract in early 2016.

However, contributions from that business should improve with its 2015 purchase of 50% of Sabinco Soluciones Modulares S.A. for $25 million. That Chilean company rents out temporary office and housing structures to miners and other industrial operations. Sabinco also controls 10% of the country’s modular housing market. Demand for that low-cost housing in Chile’s large mining sector has risen along with commodity prices. As well, the company’s expertise will help improve the profitability of its new joint venture.

Blue Chip Stocks: One ATCO share provides $47 worth of Canadian Utilities

ATCO’s main appeal continues to be its “holding company discount”: currently, you can buy an ATCO share for $49 and get $47 worth of Canadian Utilities.

This means you get the structures business for just $2. The company has no plans to split itself up right now, but the chance of a spinoff adds appeal.

ATCO’s complex structure makes it harder to value than “pure play” firms. That’s why its p/e is lower than Canadian Utilities: its shares trade at 15.2 times the $3.23 a share that the company will likely earn in 2017.

ATCO also recently raised its quarterly dividend by 14.9%, to $0.3275 a share from $0.285. The new annual rate of $1.31 yields 2.7%. The company has now increased its dividend each year since 1993.

The class I (X) non-voting shares are more liquid than the class II (Y) voting shares.

Recommendation in The Successful Investor: ATCO class I stock is a buy

For our views on one group of perennial Canadian blue chips, read Investing in Canadian banks is a route to lower risk.

For our recent report on one of Canada’s best-established blue chip stock, read BCE hikes its dividend on strong earnings, outlook.

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