Key points

• Some of today’s blue chip babies are companies that fell from grace but have managed to make good again – like Amcor and Lend Lease.
• Ansell, Computershare and Brambles have great market leading businesses.
• CSL and Ramsay Health Care are in a league of their own.

Blue chip status comes from many years of consistently rising profits and dividends, but also comes from the company having a strong business with a competitive advantage that should be sustainable. But blue chip status is not granted once and for all: there are many examples of blue chip stocks that fell from grace.

Indeed, expectations are higher for blue chips, and if they happen to disappoint the market, the share price reckoning can be savage. No blue chip stock can be expected only to rise and never fall, but you can invest a bit more confidently if you know that the business has a sound growth story from which to generate its cashflows.

Here are seven stocks that that are on the cusp of blue chip status – if they are not there already. A common theme to these stocks is overseas income, which crimps the ability to frank dividends. But if your portfolio is based around Australian-dominated earnings flows – like the big four banks and Telstra – this can be handy diversification.

Ansell (ANN)

Market capitalisation: $4.1 billion
One-year total return (capital gain plus dividends): 41.3%
Three-year total return: 25.9% a year
Five-year total return: 19.1% a year

Spun off by former owner Pacific Dunlop in 2001, Ansell has become one of Australia’s global leaders, with strong brand power in its businesses of protection products, in gloves, workwear, healthcare safety and sexual wellness. The global business units are Industrial Solutions, Medical Solutions, Single-Use Solutions, and Sexual Wellness, with the star division in terms of growth momentum for the company at present the Single-Use division. Excellent recent acquisitions of UK-based protective clothing business Microgard and US single-use gloves provider BarrierSafe have complemented Ansell’s portfolio nicely.

Earlier this year Ansell boosted its first-half net profit by one-third to US$87.7 million (the company reports in US$) and maintained its earnings guidance for the full financial year at $US1.18–$1.26 a share, a rise of 7%–15% if achieved. Like all the stocks that report in US$, a lower A$ against the US$ improves the dividend flow, but the downside of that is that the dividend is unfranked. Ansell is not a stellar income play, with the FY15 analysts’ consensus estimated yield coming in at 2.1% (on current exchange rates) and FY16’s not much better, at 2.2%. Analysts are not bullish on the stock, either, in the short term, with the consensus price target, at $26.88, only marginally higher than the share price. But longer-term, Ansell offers high-quality, defensive global earnings exposure.

Amcor (AMC)

Market capitalisation: $17.5 billion
One-year total return: 40.7%
Three-year total return: 33.7% a year
Five-year total return: 26.3% a year

Packaging giant Amcor is a former blue chip that lost its way, in its case an ugly price-fixing mess with competitor Visy in the mid-2000s. But from mid-2009 Amcor has worked hard to regain its lustre. In fact, the Australian packaging assets involved in the price-fixing debacle were successfully floated off as Orora in December 2013, mainly because Amcor realised that its global businesses would generate superior scale and returns.

Amcor has an outstanding portfolio of established and growing packaging businesses serving the food, household items, beverages, tobacco products and medical products industries. Over the last few years the company has made a number of acquisitions in Asia – and more recently, South America – to expand its footprint in the emerging consumer economies. Again, Amcor is not a stand-out dividend income stock, with the consensus forecast dividend yield for FY15 at 3.2%, lifting to 3.4% in FY16, both unfranked. Analysts see the stock as about 1.5% over-valued compared to their consensus price target. But also again, the company has considerable long-term growth potential and returns that tap into to the big long-term growth areas of the global economy.

Brambles (BXB)

Market capitalisation: $17.9 billion
One-year total return: 22.2%
Three-year total return: 26% a year
Five-year total return: 17.4% a year

Logistics giant Brambles is also one of Australia’s global leaders, being the world’s largest provider of pallets and reusable crates and containers.

Globally, it is a business that would be very difficult to replicate and that gives it a considerable competitive advantage. Brambles fell from grace in the 2000s as a blue chip – with the nadir being the embarrassing loss of millions of pallets – but has earned back the trust of the market, as it should, given its competitive advantage and position in the global supply chain.

Despite challenges in North America, the company has guided the market to expect full-year underlying profit coming in between $US1.055 billion–$US1.085 billion, which would be a rise of about 13% at mid-range. At current exchange rates, BXB is forecast to yield 3% in FY15 and 3.1% in FY16: franking was only a little over 30% at June 2014 and that is expected to be the case in FY15. Analysts see it as fully valued, but Brambles is one of the elite Australian-listed global industrial stocks.

Computershare (CPU)

Market capitalisation: $7.2 billion
One-year total return: 5.7%
Three-year total return: 21.1% a year
Five-year total return: 6.6% a year

Another Australian world leader, Computershare is the largest global operator of share registries, operating in 20 countries. It also manages employee share and option plans, and provides investor relations and market intelligence services. It is another company that has built a strongly defensive business but also one that can be expected to show strong earnings growth in the future.

Computershare also reports in US$: that is one of the trade-offs to owning a global leader. As such it will benefit from a falling Australian dollar and rising US interest rates, but it also means that it is not an income stock: the consensus FY15 yield is 2.7%, rising to 2.8% in FY16, with dividends having been consistently 20% franked in recent years. The consensus target price is 2.5% above the current price, but the most bullish broker, Macquarie, sees almost 17% upside from current levels.

CSL (CSL)

Market capitalisation: $44.2 billion
One-year total return: 34.4%
Three-year total return: 38.7% a year
Five-year total return: 27% a year

The former Commonwealth Serum Laboratories is one of the great stories of the Australian stock market. When the Australian government floated CSL on the stock market in June 1994, it clearly did not have a clue as to what it owned.

CSL was floated at $2.30, raising $300 million. A three-for-one share split in 2007 means the float price was effectively 77 cents a share. Each of those shares now trades at over $92. Add in the $10.21 that has been paid in dividends and the original shareholders have made over 130 times their investment.

Along the way, CSL has become the dominant global player in plasma products such as antibodies and albumin, which are medical necessities, and also makes vaccines, including the influenza vaccine globally. CSL has everything you want in a stock: very strong market position, economies of scale, high barriers to entry, and significant pricing power. But it is fairly fully priced: on consensus, analysts see it reaching $94.68, but there are some more optimistic views than that, most notably UBS, which has a target price of $105.50. Another US$ reporter, CSL also does not set the world on fire as a dividend-payer: on current exchange rates, the consensus expected FY15 yield is 1.7%, rising to 1.9% in FY16, unfranked. But there is still plenty of growth potential for CSL, and profits are expected to rise strongly (in US$) this year and next.

Lend Lease (LLC)

Market capitalisation: $9.2 billion
One-year total return: 30.2%
Three-year total return: 37.6% a year
Five-year total return: 21.7% a year

Property and infrastructure heavyweight Lend Lease was a former blue chip that lost its way in the 1990s and 2000s, aggressively buying and selling assets and expanding overseas – effectively becoming a diversified REIT (real estate investment trust), but over-paying for many assets in over-leveraged times. The company has been rebuilt into a global property, infrastructure and construction player, with key investments in US healthcare, Asian urban regeneration projects, the Elephant & Castle project in London, Victoria Harbour in Melbourne and the Barangaroo property development in Sydney.

At the recent half-year, Lend Lease beat market expectations with a 25% profit increase, and said it was “comfortable” with market consensus forecasts of a full-year net profit in the $604 million–$628 million range, compared to $823 million last year (a result which was boosted by the one-off profit from the sale of its stake in the mall in Bluewater in Britain.)

A growing development pipeline internationally augurs well for Lend Lease and analysts are generally bullish on the stock, with the consensus target price 5.1% higher than the current share price, at $17.51. The consensus estimated FY15 dividend yield is 3.2%, increasing to 3.9% in FY16, but dividends are unfranked because of the nature of the overseas earnings flow.

Ramsay Health Care (RHC)

Market capitalisation: $12.8 billion
One-year total return: 35.7%
Three-year total return: 47% a year
Five-year total return: 38.7% a year

Private hospital operator Ramsay Health Care has a portfolio that spans Australia, the UK, France, Indonesia and Malaysia, and recently entered a new joint venture with Chinese healthcare company Chengdu Jinxin Healthcare Investment Management; but this is considered more a foothold in the Chinese market for the long-term opportunities, rather than an immediate earnings boost. In the recent half-year Ramsay beat expectations on revenue, which rose 42% to $3.3 billion, and interim net profit, which increased 21% to $191.4 million. The interim dividend of 40.5 cents a share was up 6.5 cents, or 19.1%, on last year.

Ramsay also boosted its full-year guidance, saying it expected to lift core net profit by 18%–20% at the full-year, up from 14%–16% previously. All parts of Ramsay’s business are performing well, and the company has started to see profit contribution from its French hospital business General de Sante, the largest private hospital operator in the country (a Ramsay-led joint venture took control in October 2014.) In all of the areas in which it operates, Ramsay is beautifully positioned for the demographic driver of an ageing population and the resultant rising demand for healthcare.

Ramsay has delivered impressive growth in total return in recent years, more from share price appreciation than dividend income – the company is not a great income stock, with an analysts’ consensus forecast yield of just 1.6% in FY15 and 1.9% in FY16, fully franked. Analysts see it as fairly fully valued, trading just 2.7% below the consensus target price of $65.17. But Ramsay is a high-quality business with plenty of upside globally to grow.

*Charts sourced at Yahoo!7 Finance, 1 June 2016

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.