What Is a Blue Chip Company?

When it comes to investing, I believe it’s best that you have as wide a general knowledge as possible. That’s why I picked yet another topic for you to tackle in this piece – the blue chip company. Let’s shed some light on the blue chip companies, stocks, indices, who they are, what is their history, their advantages and disadvantages and all the other tidbits of information I can think of to share with you.

The Concept of a Blue Chip Company

The simplest definition possible for a blue chip company goes like this. A blue chip company is typically a very large, sometimes even giant, international corporation with a very stable track record of rendering earning and very little debt. These corporations are at the very top of their industries and have a very strong name. The products they make or services they provide are renowned worldwide and dominate the market.

As a rule, there is no requirement, formal or informal to being a blue chip company. Once you reach a certain status that falls more or less in the lines I described above, the industry and your peers alike start considering you a blue chip company.

Do you know where the term actually comes from? I’ll tell you. From poker. A blue chip is the one with the highest value. You can use it as a mnemonic device if you want. In this way, you can remember a lot easier what these companies are all about.

Maybe you’re wondering now why I chose this particular topic. Well, it wasn’t because I like to brag about my extensive knowledge of finance. It was actually because I wanted to give you a hint.

Blue chip companies have always been considered a safe investment. Being so big, on top of their game and market leaders, they produce steady and regular income. They are also very highly unlikely to flop or fail. Think about it in an easy equation. Do you believe McDonald’s is going anywhere anytime soon? Or CocaCola? Or Wal-Mart, for that matter? No. Therefore, from an investment point of view they have the green light all the way down the street.

They have the unique ability to generate profit even when the world faces an economic downturn. Even in recession periods, people will still drink Coke. It’s a sweet and cheap drink. Plus, it’s the king of its niche.

Blue chip companies also have what is called a stable growth rate. Therefore, they are a lot less volatile than sister companies who are not so well-established as they are.

They also follow one or more indexes very closely. Take a look at Apple. They received their status as blue-chip back in 2015. Since then, they have followed both Nasdaq 100 and the S&P 500.

Here are some examples of blue chip companies around the world.

• Nokia (Finland)
• GDF Suez (France)
• Johnson & Johnson (United States)
• Walt Disney Co. (United States)
• Home Depot (United States)
• Bayer (Germany)
• BNP Paribas (France)
• BP (United Kingdom)
• Vodafone Group (United Kingdom)
• McDonald’s Corp. (United States)

While we’re on the topic, it’s important for me to mention the blue chip stocks and the blue-chip indices, for disambiguation reasons.

More often than not, while perusing your way through the financial literature of the day, you will come across the simple term ‘blue chip.’ It has given me quite the headache back in the day until I understood that there are three different things it can refer to.

• The blue chip company – which I am debating at large in this piece.
• The blue chip stocks – most of the blue chip stocks pertaining to blue chip companies are common stocks. This means that, through them, you can claim a portion of the profits or, in other words, dividends. Examples of blue chip stocks include Nestle, Volkswagen, Nokia, Siemens, Bayer, Chevron, McDonald’s, Wal-Mart, and so on.
• The blue chip indices –blue chip indices are comprised of blue chip stocks, and there are quite a lot of them. A perfect example would be the famous S&P 500 or the Dow Jones Industrial Average.

Advantages and Disadvantages of Blue Chip Companies

We’ve seen what they are and what they can do. I, for one, was surely impressed. Still, are there any downsides to investing in these giants of the industry and the financial market? Let’s take a quick peek at the advantages and disadvantages of investing in them.

Advantages of the Blue Chip Companies

 

1. Security

This might be the one criterion that sells a blue chip to anyone. You know very well just how good they are doing from every point of view. This will give you some much needed peace of mind when it comes to your investments and portfolio. The companies are as stable as they come, their balance sheet is very strong, and their management is truly world-class. You cannot find a more secure investment than a blue chip company.

2. Recovering Comes Easy

The market sometimes crashes. I know that, you know that, everyone knows that. When that happens, it takes a long time for companies to get back on their feet. Moreover, the process is usually strenuous and complicated. Not for blue chip companies, though. Given the fact that they are so stable, recovery after a market crash will come very easy for them.

3. The High Return

If you decide to invest in them, there will be a high return. That happens especially when you manage to find the stocks, blue chip of course, at a low price. It will increase over time, evidently.

Disadvantages of the Blue Chip Companies

 

1. The Growth Prospects Can Be Moderate

I’m talking here about potential growing on the market. The companies are, usually, giants. Their stocks are what drives the market averages. Therefore, the returns from blue chips viewed as a group won’t go very far from the return of the stock market indexes.

As an example, take Coca Cola again. Let’s make it duel with a brand new company that’s only now beginning on the market. The baby company has a huge potential of coming up with a very hip and modern product that attracts audiences and doubles or even triples its sales. As for Coca Cola, consumers are very used to its product. It’s highly unlikely it will ever come up with anything else new that could manage to double its sales.

2. They Focus on Dividends

This can be a disadvantage or not, depending on what you want. It is true that blue chip companies offer dividend payments that increase steadily as time goes by. However, this is an amazing plan for those who wish to use that money for, let’s say, retirement. This is why they say that blue chip stocks are an old man’s game.

If you are a young investor, however, and want to build wealth to enjoy sooner rather than later, than you might want to rethink the plan. Go for growth stocks as opposed to dividend stocks.

3. Bad News Are Important

When I said that these are huge companies, I meant it. They are famous internationally and a lot of people own stocks with them. Although they are quite secure, you need to understand that anything can happen. And they are always in the public eye and the center of the media. All the good news is already part of the stock price of your favorite blue chip company. Still, in the same way, when there’s bad news, it will affect the share price.

There you have it. All you need to know about blue chip companies, indices, stocks, and everything in between. What are your thoughts? Are you thinking about investing in them?

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