Why Large-Cap Shares are Important for Your Portfolio

If you are an investor who is looking for some high growth investments, it’s likely that you’ll not be focusing on companies with large market capitalisations at all.

Yet, the decision to completely pass on large-cap shares is something that you might want to reconsider.

But first, what does ‘large’ actually mean when we’re talking about large-caps? Generally, companies with a somewhat globally-diversified business with a market capitalization of at least $10 billion would be labelled as large-caps.

Other popular connotations that go with the large-cap label include consistent dividends and a healthier balance sheet.  In our local context in Singapore, all 30 components of the stock market benchmark, the Straits Times Index (SGX: ^STI), can be considered as large-caps.

Why Large-Cap?

Sometimes in business, bigger is better. Large-cap companies might be able to find business prospects that smaller companies have no access to due to the stronger network and larger cash holdings that the former group possesses.

For example, DBS Group Holdings (SGX: D05), being the largest bank in South East Asia, might be more equipped to finance, say, a huge regional construction project in Vietnam as opposed to a small local lender like Hong Leong Finance (SGX: S41).

Nonetheless, not all large-caps are created equal. There’s always the wheat and the chaff and the question is: How can we go about choosing a suitable large-cap company for our portfolio?

Balance Sheet

Having a strong balance sheet reduces risks forshareholders. Take aircraft engineering firm, SIA Engineering (SGX: S59) for instance. It has equity of S$1.3 billion on its balance sheet while having total debt of less than S$15 million. This gives the company a strong foundation to brave through downturns in its industry and also allows it to grasp new opportunities when it arises. With all things equal, having a stronger balance is always a better option.

Dividend Growth

A company that has the ability to consistently pay a dividend is a sign of a management team that is good at capital allocation.

As my fellow contributor Chong Ser Jing once pointed out, the conglomerate Jardine Matheson Holdings (SGX: J36) has a 14 year-record of consecutive annual dividend increases. Although past history is by no means a guarantee of the future, it’s not hard to imagine how the company’s management might want to keep that record going for as long as they can through proper management of the company’s businesses.

A Foolish Take

Lastly, for an investment to make sense, you might have to buy it at an attractive price. Building an investment portfolio is like building a business empire. If you have a billion dollars, would you risk all your money on speculative, high growth companies that have high chances of failure?

Or, would you rather have a portion of your portfolio be placed with stable and high quality businesses to preserve your wealth and utilize only a small portion for riskier high growth ventures?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.