January 2024

Big brands, big valuations, potentially big disappointments

Some blue-chip stocks should be called ‘beige’ chips. Year after year, they underwhelm the market and dampen long-term portfolio returns. 

Consider Telstra Group. For a time, the telco giant was among the bluest of blue-chip stocks on ASX and sought for its dividend. Telecommunications demand boomed as we used more devices and downloaded more data. 

But competition in Telstra’s market intensified and regulatory risks rose. Its growth stagnated. Over 10 years, Telstra’s annualised average total return (including dividends) is 1.96%. Over 15 years, Telstra’s annualised total return is 5.08%.¹

Returns from Telstra have barely kept up with inflation in the past decade. In the last 12 months investors have earned more from term deposits than Telstra shares.²

Telstra is far from alone. Many blue-chip stocks in Australia and overseas deliver modest returns over long periods. Wesfarmers, owner of Bunnings and K-Mart, has a 10-year annualised total return of 7.8%.³ QBE Insurance Group’s 10-year annualised total return is 5.1%.⁴
 
These and other stocks reinforce a few investment truths. The first is the danger of believing all ‘household-name’ stocks deliver attractive returns and are less risky. Some companies are hard ships to turn when industry conditions wane.

Another danger is basing investments on the past rather than the future. Often, last decade’s stock winners are this decade’s losers. But too many investors can overpay for blue-chips as their valuations peak, believing past company performance will continue long into the future.

Long-term wealth creation is not built on labels, such as ‘blue-chips’, or shortcuts. It relies on rigorous, bottom-up analysis of companies and valuation – the type of work PM Capital has done day in, day out, for the past 25 years. 

That is the only way to tell if a blue-chip is a beige-chip in disguise. Or if the market is overlooking a beige stock that is on the verge of stronger growth. 

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Notes and references

¹Morningstar. At 24 January 2024. Total return assumes dividend reinvestment.
²To 24 January 2024
³Morningstar. At 24 January 2024. Total return assumes dividend reinvestment.
⁴ibid

This insight is issued by PM Capital Limited ABN 69 083 644 731 AFSL 230222 as responsible entity for the PM Capital Global Companies Fund (ARSN 092 434 618), the PM Capital Australian Companies Fund (ARSN 092 434 467) and the Enhanced Yield Fund (ARSN 099 581 558), the "Funds". It contains summary information only to provide an insight into how we make our investment decisions. This information does not constitute advice or a recommendation, and is subject to change without notice. It does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Investors should consider the Target Market Determinations and the current Product Disclosure Statement (which are available from us), and obtain their own financial advice, prior to making an investment. The PDS explains how the Funds' Net Asset Value are calculated. Past performance is not a reliable guide to future performance and the capital and income of any investment may go down as well as up.