They dominate the shareholder lists, and the S&P/ASX 200 Index in terms of weighting. They are the “blue chips” of the Australian market, the strongest, most rock-solid stocks.

The blue chips attained their status because they generally show very strong track records of generating return for shareholders, but they cannot be expected to be immune from a market slump. For example, between November 2007 and February 2009; when the S&P/ASX 200 Index lost 54.5%, all the blue chip Australian stocks of course fell too. But the blue chip stocks generally recover quickest from share market slumps.

More recently, blue chip status has become associated with high dividend yields, as low interest rates have pushed investors to look to the share market for income. The growth of self-managed super funds (SMSFs) has generated huge demand for fully franked dividend income, which is augmented greatly in SMSF hands by the partial rebate of franking credits to a fund in ‘accumulation’ phase and full rebate of the franking credits in ‘pension’ phase.

This effect has elevated the likes of the big four banks, Telstra and retail giant Wesfarmers past blue chip status almost to that of sacred cow.

But holding blue chips should not be considered a set-and-forget investment – just as, at some times, they represent relatively good value, they can also sometimes move to an over-valued state.

This week and next, we’ll be looking at what the market is saying about the top blue chip stocks, and the next big blue chip things. This week, here is the tale of the tape on the Magnificent Seven – the ASX’s seven largest stocks by market value.

CBA

Market cap: $137.9 billion
Five-year total return: 16.7% a year

Consensus estimated FY15 yield: 5.1%
Consensus estimated FY16 yield: 5.2%
Consensus estimated price target: $86.38 (3.9% upside risk)

The Australian banks are still mighty profit engines, but the market is grappling with the likelihood that the banks will be forced by regulators in the near future to hold more capital (against the risk of bank collapses), thus crimping their ability to pay dividends. Bank prices have run strongly as yield-oriented investors pile into the dividends – which can yield twice as much as the banks’ own term deposit interest rates – and while that relative value is likely to remain in place, investors buying bank shares for capital growth in the short term could be disappointed.

CBA analysts are definitely split on the stock, with views ranging from Citi’s ‘sell’ call, with price target of $80.00, to Macquarie’s ‘outperform’ rating, and hefty price target of $100.96.

Source: Yahoo!7 Finance, 25 May 2015

BHP Billiton

Market cap: $104.3 billion
Five-year total return: –1.3% a year

Consensus estimated FY15 yield:* 5.4%
Consensus estimated FY16 yield:* 5.4%
Consensus estimated price target: $32.51 (11.2% upside risk)

BHP has been trying to grow its business in an environment of weak commodity prices, expand its “progressive” dividend policy and protect its credit rating. It has just spun off “non-core” base metals and (some) coal operations in the form of South 32, and BHP is now honed down to its core “four pillars” operations of iron ore, copper, coal and petroleum, with potash held as a fifth, future growth option.

While BHP has been a recent laggard, analysts are surprisingly optimistic on the stock, led by Deutsche Bank, which has a price target of $36.20 on BHP – or almost 24% higher than the present price. Credit Suisse is the least impressed broking firm, rating BHP an ‘underperform’ at present – with a price target of $29, and JP Morgan also sees the price falling, holding a ‘neutral’ rating.

• BHP reports in US$: estimated yield using the current A$/US$ exchange rate of 78.23 US cents.

Source: Yahoo!7 Finance, 25 May 2015

Westpac

Market cap: $103.1 billion
Five-year total return: 14.8% a year

Consensus estimated FY15 yield: 5.7%
Consensus estimated FY16 yield 5.9%
Consensus estimated price target: $35.28 (8.4% upside risk)

Westpac presents a surprising optimism from its analyst pack on price, with two of eight firms rating it better than ‘hold’ (JP Morgan has an ‘overweight’ call, while UBS calls it a buy.’) But even some of the firms making hold/neutral calls see significant upside in the stock, and the consensus prices WBC with 8.4% upside.

Source: Yahoo!7 Finance, 25 May 2015

ANZ Bank

Market cap: $91.6 billion
Five-year total return: 15.2% a year

Consensus estimated FY15 yield: 5.7%
Consensus estimated FY16 yield: 5.9%
Consensus estimated price target: $34.97 (9.1% upside risk)

ANZ’s analyst are also divided in their views, ranging from Morgan Stanley’s ‘underweight’ call, and $30.90 target price, to JP Morgan’s ‘add’ rating and highly bullish price target of $39.00.

Source: Yahoo!7 Finance, 25 May 2015

NAB

Market cap: $83.6 billion
Five-year total return: 15.1% a year

Consensus estimated FY15 yield: 6.0%
Consensus estimated FY16 yield: 6.1%
Consensus estimated target price: $35.64 (7.3% upside risk)

All of NAB’s analysts see the stock moving higher in price, with targets ranging from $33.50 (Citi) to $38.55 (Morgans). Surprisingly, although it is the most bullish on price target, Morgans only rates NAB as a ‘hold’. Only two brokers have an unambiguously positive rating on NAB, with Credit Suisse on ‘outperform’ and Morgan Stanley (overweight).

Source: Yahoo!7 Finance, 25 May 2015

Telstra

Market cap: $75.8 billion
Five-year total return: 24.6% a year

Consensus estimated FY15 yield: 4.9%
Consensus estimated FY16 yield: 5.2%
Consensus estimated target price: $5.70 (8.1% downside risk)

According to the analysts that follow it, Telstra has temporarily given up the effort to regain February’s 14-year peak of $6.60 – the stock is down 6% since then, with further downside opening up underneath it. Telstra posted a healthy increase in first-half net profit, up 21.7% to $2.1 billion, but its revenue growth was subdued. Telstra has massively rewarded investors who stuck with it (or even better, bought it) in the dark days of a sub-$3 price four years ago, but analysts see a pullback in the offing. Longer-term, the evolution of the “Internet of Things” – wireless connectivity enabling machines to swap and processing information in real time, with computer-connected humans observing, analysing and acting upon the resulting ‘big data’ explosion – will be a huge driver for Telstra, but for now, it is considered over-valued.

Source: Yahoo!7 Finance, 25 May 2015

Wesfarmers

Market cap: $50.5 billion
Five-year total return: 14.6% a year

Consensus estimated FY15 yield 5.0%
Consensus estimated FY16 yield 5.0%
Consensus estimated target price: $42.44 (3.2% downside risk)

Although Wesfarmers is still a conglomerate, the sheer success of its retail businesses, including its hardware powerhouse Bunnings, means it is now effectively a retailer, generating more than 90% of its earnings from that source. Buying the Coles Group’s retail brands in the midst of the GFC was a transformative move. Wesfarmers is extending its footprint further into financial services – it recently bought GE’s 50% share in their $850 million joint venture credit card business, which has been issuing credit cards under the Coles brand in Australia for more than two decades. But investors mainly view it in comparison with retail arch-rival Woolworths: it has opened up a big premium there – analysts have it trading on a prospective FY15 price/earnings (P/E) ratio of 20.1 times earnings, compared to Woolworths’ 14.6 times earnings; for FY16, Wesfarmers is priced on 18.7 times earnings versus Woolworths on 14.9 times earnings. But analysts see Wesfarmers as fully valued for the present.

Source: Yahoo!7 Finance, 25 May 2015

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