In investing, everyone wants big rewards with low risk. Blue chip stocks seek to offer that powerful combination through the companies that have established themselves as the leaders of some of the most profitable industries in the global economy. Because of their dominance of their respective industry niches, blue chip stocks tend to have competitive advantages that can feed into further growth opportunities. Yet most blue chip stocks have long enough histories that they've established their ability to survive through good times and bad, avoiding the flameouts that weaker rivals often end up succumbing to before falling out of the limelight.
Not everyone agrees on the exact definition of a blue chip stock. Some delegate the responsibility of establishing which stocks qualify as blue chips to S&P Dow Jones Indices, which is responsible for coming up with the 30 stocks that make up the Dow Jones Industrial Average (DJINDICES: ^DJI). It's certainly the case that just about every Dow component has worked hard to gain admission to the venerable stock market benchmark, and the list includes the leaders of many prominent industries. Because of that fact, you'll find members of the Dow Jones Industrial Average among the five blue chip stocks discussed below.
However, by nature of the methodology that S&P Dow Jones Indices uses to select Dow components, the average will inevitably leave out some of the most prominent, highest-quality businesses on the planet. If you want the best of the best in blue chip stocks, it's worth going outside the Dow to consider some other leaders in their fields with strong prospects for growth extending well into the future.
5 top blue chip stocks
10-Year Cumulative Total Return
Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)
Caterpillar (NYSE: CAT)
Walt Disney (NYSE: DIS)
Starbucks (NASDAQ: SBUX)
UnitedHealth Group (NYSE: UNH)
Data source: Yahoo! Finance. Returns as of July 31, 2019.
Let's take a closer look at these five companies to see why they're among the cream of the crop even in the rarified air of blue chips.
1. Berkshire Hathaway
Berkshire Hathaway is one of the most popular stocks in the market, and the primary reason is CEO Warren Buffett. Buffett's prowess as an investor has earned him the moniker of "the Oracle of Omaha," referring to Berkshire's corporate headquarters, and the company's success has made it a clear blue chip in the financial industry.
Berkshire's roots as a textile company date back to the 19th century, but Buffett's purchase of a majority stake in the business in 1964 marked the turning point for the company. From there, Berkshire started to incorporate insurance operations, and over the first couple of decades of Buffett's ownership of the company, Berkshire increasingly got itself involved in providing different types of insurance.
Berkshire's operations are vast and cover a lot of territories. At the core of its business remains Berkshire's insurance and reinsurance division, which primarily offers property and casualty insurance to domestic customers. However, the scope of Berkshire's insurance business is a lot bigger than that, with its acquisition of financial services company Gen Re and insurance provider GEICO in the 1990s adding international commercial exposure; other reinsurance lines in areas like life, accident, and health insurance; and personal lines in the auto and homeowners areas. Subsequent expansion has added specialty items like bond insurance and coverage for special events like promotional sweepstakes prizes.
Image source: GEICO.
Beyond insurance, Berkshire has assembled a conglomerate of companies in different industries. You'll find wholly owned industrial companies like railroad giant Burlington Northern Santa Fe and aircraft charter service NetJets, as well as consumer favorites like restaurant chain Dairy Queen, chocolate maker See's Candies, jewelry retailer Ben Bridge Jeweler, and Nebraska Furniture Mart. Other units of Berkshire offer real estate services, building products, apparel, and utility services.
One reason why Berkshire Hathaway works so well as a blue chip stock is that it also has extensive holdings of publicly traded companies. In the financial industry, Berkshire's top stock holdings include American Express, Wells Fargo, and Bank of America, and the company has a history of providing assistance to financial institutions -- especially during the financial crisis in 2008. You'll also find extensive positions in Apple, Coca-Cola, and a host of airline stocks among Berkshire's holdings, showing the importance of diversification in Buffett's investing style.
Buffett's overall philosophy has been a key component of Berkshire's success, and the way he invests informs how Berkshire operates. Buffett invests for the long run but can recognize when he's made mistakes in assessing the long-term prospects of a business, and he won't hesitate to sell off a position even at a loss when it no longer meets his investment criteria. His interest in buying stocks in companies that he understands well plays to his strengths, and he always takes valuation to heart in deciding whether to pull the trigger in buying an investment. Often, you'll find Berkshire on the other end of what seems to be popular wisdom, taking contrarian positions that can turn out wonderfully for Buffett and his company. The way in which the Berkshire CEO informs himself about current events that are relevant to the business world gives him a unique perspective from which to assess opportunities, and much of Buffett's success stems from his ability to remain patient and simply wait rather than jumping at an investment that isn't an ideal fit for Berkshire.
In many ways, investing in Berkshire is like investing in the entire stock market, because the scope of Berkshire's empire is so large. That provides the stability that investors in blue chip stocks like to see, but Berkshire shareholders also get the benefit of Buffett's insight and reputation. Even at 88, Buffett's dedication to his company is unparalleled, and his commitment lends much to Berkshire's blue chip status.
Caterpillar's history as a company dates back to 1925, when two pioneers in the tractor industry, C.L. Best and Benjamin Holt, joined forces and released a product line of five tractors. It didn't take long for Caterpillar to extend its reach to build a wide range of heavy equipment, and the industrial powerhouse quickly became important parts of what made large infrastructure projects like the Hoover Dam and the Golden Gate Bridge possible.
Now, Caterpillar provides equipment used for the broadest possible range of applications. The company's tractors, excavators, backhoe loaders, graders, wheel loaders, and off-highway trucks are favorites for customers in the construction, mining, forestry, infrastructure, transportation, and energy industries. In order to assist customers with making equipment purchases, which can require substantial capital, Caterpillar also has an internal financing and insurance division to offer attractive terms to would-be buyers. The company has become a global behemoth, with manufacturing operations in more than 100 different facilities in about two dozen countries across the world.
Image source: Caterpillar.
Caterpillar owes much of its success to the rise of the global economy over the course of its history. Its role in fostering the rise of the U.S. economy in the 20th century was instrumental in providing a foundation from which to expand around the globe. More recently, surging levels of economic activity in emerging markets like China, Brazil, and India provided Caterpillar with opportunities for further expansion, and the drive to build out infrastructure in new markets has continued to support the heavy machinery business over the long run.
As an industrial giant, Caterpillar's business is subject to the ups and downs of the business cycle, and that's presented some challenges for its shareholders. When the global economy has been strong, Caterpillar has been able to attract dramatic gains in revenue from customers who are flush with cash and aiming to boost their productivity by buying equipment. The big share-price gains that Caterpillar has enjoyed during healthy economic times like the mid-2000s and early 2010s stand as a testament to just how much the company benefits when times are good. Yet when economic prospects become cloudier, customers pull back on their capital spending plans, and that creates temporary slumps in Caterpillar's results that have resulted in substantial pullbacks for the stock.
That's particularly true when you look at the specific industries that Caterpillar has served. For instance, much of Caterpillar's success in the early 2010s stemmed from the mining industry, which was benefiting from soaring prices for gold and silver. When the precious metals markets started turning lower in 2012 and 2013, however, demand from mining companies for Caterpillar equipment saw a devastating decline. Typically, Caterpillar's different segments have cyclical moves at different times, helping to provide a buffer for the impact on the equipment manufacturer's overall results, but it doesn't always work out that way.
However, when you smooth out the cyclical variations in Caterpillar's business, the equipment maker has enjoyed consistent long-term growth. The company's innovation makes its products attractive to its buyers, and even if they might delay buying equipment when money's tight, that pent-up demand has always eventually given way to future purchases. Caterpillar still has strong prospects in fast-growing economies like China, and its home U.S. market has continued to offer opportunities for growth that Caterpillar has capitalized on well. Having overcome obstacles to growth in the past, investors can be confident that the Dow component will be able to find solutions to its challenges and keep enabling its customers to get things done the way they want.
3. Walt Disney
Walt Disney showed his talent as an animator from childhood, and with the encouragement of his brother Roy, the artist built a business as a cartoon studio. Walt's ambition of creating full-length animated feature films seemed like a huge stretch over the cartoon shorts that typically preceded movies during the early 20th century, but with the successful full-length feature film Snow White proving the financial viability of the enterprise, the Walt Disney Company made its debut with a bang.
Since then, the business carrying Disney's name has grown into a colossus. Disney's movie studio has grown both through organic expansion and with major acquisitions, with the purchases of Pixar, Marvel, and Lucasfilm creating a powerhouse that's chock-full of some of the most valuable movie franchises in entertainment history. Disney also has a powerful retail and merchandise empire backstopping its creative production, offering customers the opportunity to buy toys, games, and other products inspired by its movie releases.
Image source: Disney.
Beyond movies, Disney has become a media powerhouse. The company owns the ESPN sports network, the major broadcast network ABC, and a host of other channels carrying its content. Its acquisition of assets from Twenty-First Century Fox added a lot of breadth to its television holdings and bolstered its movie capabilities, and ownership stakes in the video-streaming service Hulu, as well as the recent formation of its Disney+ streaming service, have carried Disney into the modern era of digital content distribution.
Lastly, Disney has established itself as an entertainment giant. The company's theme parks have become destinations in their own right, with its iconic Disney World and Disneyland properties in the U.S., as well as a wide range of international locations in areas like Paris, Hong Kong, Tokyo, and Shanghai. Disney-branded cruise ships offer an even broader travel experience, and the presence of extensive hotel and resort facilities associated with its theme parks allow Disney to profit from visitors in multiple ways.
Looking ahead, some investors have been nervous about Disney's ability to shift gears in a rapidly changing environment. Especially in the television segment, consumers' move away from traditional cable subscriptions has jeopardized the premium status of its ESPN service, which has historically been one of the biggest draws in cable bundles and brought in high prices from cable companies. It's that threat that has pushed Disney toward investing in both Disney+ and Hulu more extensively as it bids to fight back against challenges from companies like Netflix and Amazon.com and their streaming services.
Even with those concerns, however, Disney has correctly identified that its content is its most valuable asset and gives it leverage over upstarts seeking to compete against it. Even after having spent billions to bolster the amount of content it has at its disposal, the House of Mouse isn't showing any signs of slowing its pace of creativity in seeking out new opportunities to draw in customers. With nearly a century of favorites in its library and with more and more popular offerings coming out every day, Disney's in position to remain the leader of the entertainment world for decades to come.
Starbucks began business as a single location near Seattle's Pike Place Market in the early 1970s. Not long after Howard Schultz joined the company in 1982, he advocated for bringing the European coffeehouse experience to the U.S., giving customers the option to have a premium cup of well-brewed coffee on the spot rather than having to take coffee beans home to brew later. With the help of investors, Schultz purchased Starbucks in 1987 and began implementing his ideas.
Since then, Starbucks has expanded to become a global coffee empire. The company has almost 30,000 store locations, with roughly half of them owned and operated by Starbucks and the other half licensed to third-party operators. The geographical reach of Starbucks has spread to nearly every corner of the world, with an extensive presence in China and Japan, as well as the U.K. and other key areas in Europe and the Americas. Smaller store networks have emerged in many other parts of the world, and the coffee giant sees further expansion potential in several regions.
Over time, Starbucks has also sought to expand its scope with greater product diversification. Buyouts like Tazo and Teavana have established Starbucks as a tea company as well, and further forays into areas like juices and bakery items have aimed to bring more customers into the company's stores and to spend more once they get there.
The success that Starbucks has enjoyed has prompted competitors to seek to claim their share of profits. Dunkin' Brands has gone beyond its traditional emphasis on donuts and other baked goods to offer a broader lineup of coffee beverages, benefiting from the greater awareness that Starbucks brought to the coffee realm in general. Even fast-food pioneer McDonald's has jumped onto Starbucks' bandwagon, with its McCafe line of beverages looking to differentiate itself on the basis of price while also reinvigorating its breakfast business.
Yet Starbucks has fought back by adapting to changing consumer preferences. The company has fully embraced the mobile technology revolution, making it possible for customers to order items using its mobile app and cut back on the waiting time that walk-up customers spend in line. Starbucks is also offering delivery in many locations, saving coffee lovers time. The resulting shift in what customers want from Starbucks has produced some other changes, including new store formats that have moved away from the company's "third place" goal of providing a comfortable environment in which to spend significant amounts of time and toward a more functional layout to facilitate mobile pickup and delivery, as well as host traditional visitors.
Image source: Starbucks.
Establishing a competitive moat is always a difficult proposition for a consumer-facing company, and the vast array of coffeehouses in the U.S. and around the world is a testament to how easy it is for a rival business to set up shop against Starbucks. Yet Starbucks has built up a loyal customer base, and as its loyalty program has shown, those patrons aren't likely to abandon the company they know and love even if it might be cheaper or more convenient at a given time. By keeping its finger on the pulse of the coffee-loving public, Starbucks will be the company to beat in the coffee space for years to come.
5. UnitedHealth Group
Healthcare is one of the fundamental needs that every human being has, and every year, Americans spend trillions of dollars on healthcare. UnitedHealth Group has a diversified healthcare business that includes not only health insurance but also healthcare services like wellness, pharmacy benefit management, and data analytics designed to help employers manage their healthcare costs and make their employees healthier. The company has been around since the 1970s, helping to pioneer the then-new concept of health maintenance organizations and provide healthcare plans for senior citizens. After going public in 1984, UnitedHealth continually expanded, adding new focus areas that cover its customers' health needs more comprehensively.
UnitedHealth has two primary businesses. Its United Healthcare unit focuses on health insurance, with divisions that serve those who get their coverage through private employers, as well as those who rely on government programs at either the federal or state level to get the healthcare they need. Although UnitedHealth largely focuses on customers in the U.S., it also has an international presence, having established a foothold in the faster-growing Brazilian market.
Image source: Getty Images.
Meanwhile, UnitedHealth's Optum health services segment has a much different focus in trying to offer additional benefits and rein in costs. The OptumRx pharmacy benefit management service gives members access to prescription drugs and other medical needs, while the OptumHealth wellness unit encourages patients to pursue practices that will make them less prone to illness and injury and reduce their overall healthcare expenditures. This part of UnitedHealth's business has grown faster in recent years, as the healthcare industry has learned that encouraging wellness can be financially beneficial, as well as smart from the perspective of staying healthy.
Success in healthcare in recent years has required companies like UnitedHealth to set strategies for how to handle the onslaught of reform efforts among various government entities. The passage of the Affordable Care Act in the early 2010s changed the playing field for health insurance companies, creating new restrictions but also offering some new business opportunities for those forward-looking healthcare businesses able to capitalize on them. UnitedHealth has thus far done a good job of figuring out how to balance the wish to expand in new and exciting directions against the prudence of ensuring that the company's core business remains intact. That balancing act still offers challenges today, but even though UnitedHealth hasn't gotten everything exactly right, it has been able to keep growing even as some of its peers run into bigger obstacles.
Still, in the insurance industry, size is an important positive characteristic, and UnitedHealth is one of the giants among its peers. That gives the company the ability to make major strategic moves like acquisitions or entering into new markets without fear that it will overextend itself and get into financial trouble.
The threat of new regulation is ever-present in the healthcare industry, and UnitedHealth can't afford to let down its guard in fighting to preserve its profitable business model. However, the agility with which UnitedHealth has been able to remain successful even with the Affordable Care Act's substantial changes shows a staying power that will be crucial in ensuring that the health insurance and wellness company will be able to keep its position as a leader in this key industry.
Be smart with blue chip stocks
These blue chip stocks have the benefit of decades of experience, giving them plenty of ability to weather inevitable storms in their businesses and find new ways to push forward and find growth. By looking closely at top blue chips like these, you'll be able to give your investment portfolio the combination of security and growth potential that every investor wants.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of AAPL, Berkshire Hathaway (B shares), Starbucks, and Walt Disney. The Motley Fool owns shares of and recommends AMZN, AAPL, Berkshire Hathaway (B shares), NFLX, Starbucks, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends DNKN and UnitedHealth Group. The Motley Fool has a disclosure policy.
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