Not All Blue Chips Are Created Equal

In Singapore’s stock market, all 30 components of the Straits Time Index (STI: ^STI) can be considered as blue chip companies.

Generally, blue chips tend to give investors a sense of safety and stability. But at the same time, it also pays to note that being included into a prestigious market index – an act which ‘confers’ blue chip status to shares in our local context here in Singapore – does not automatically mean that a share’s any less risky than non-blue chips.

In any case, it’s also important to know that blue chips can be categorised into different groups with their own unique investment characteristics. As investors, we need to understand why we might want to invest in any of them and what are the kind of risks we are exposed to.

For dividend yields

Companies such as Singtel (SGX: Z74), Singapore Exchange (SGX: S68) and Starhub (SGX: CC3) are well known for their consistent and high dividend yields.

Investors might tend to expect them to maintain their dividend or even grow them in the future. Due to this market expectation, investors should be prepared to face downward pressure on the prices of these companies should any risk of a decrease in dividend payout flare up.

For cyclical exposure

Full-service airline Singapore Airlines (SGX: C6L) recently reported a steep decline in profits. Being in a competitive and cyclical industry, investors need to understand the business cycle SIA is exposed to and expect volatile earnings every now and then.

Thus, investors might not need to get too worried when SIA is facing declining earnings, which might be an indication that a turnaround is near. Similarly, an investor should be wary when the company is enjoying ever-rising profits and not assume that the trend can last indefinitely.

To buy many businesses at the same time

Conglomerates such as Jardine Matheson Holdings  (SGX: J36), Keppel Corp (SGX: BN4) and Singapore Press Holdings (SGX: T39) tend to have more stable earnings due to the combination of many different businesses being housed under one corporate roof.

However, those companies might be subjected to a conglomerate discount where the market values them at a price much lower than the appraised sum the various businesses would fetch if they were standalone entities. A reason for that could be because the market carries a view that it is much more cost effective for investors to diversify their wealth through investing in many different companies on their own instead of depending on conglomerates to diversify on their behalf.

Foolish Summary

All told, although a blue chip company can often be the 200-pound elephant in in the industries it’s in, it can be a mistake if an investor thinks that an investment into a blue chip share is a riskless one.

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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.