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Are blue chip stocks expensive?

One of Australia’s oldest and most respected listed investment companies (LIC), Australian Foundation Investment Co.Ltd.  (ASX: AFI), has stated in its half yearly report that “we perceive the Australian equity market to be currently fully valued. We remain on the lookout for attractive long-term investment opportunities but are prepared to be patient at this point.”

Australian Foundation produced a profit of $137 million for the half year and declared an interim dividend of 8 cents per share. The portfolio – which is primarily comprised of high quality blue chip stocks – returned 14.3% for the 6 months to 31 December 2013, thereby narrowly outperforming the S&P/ASX 200 Index’s (Index: ^AXJO) (ASX: XJO) 14% return.

Whilst stating that the market at present looks fully valued, the company did manage to make a number of stock purchases during the half-year. Major acquisitions included an investment of $23.3 million in Washington H Soul Pattinson Ltd  (ASX: SOL), $16 million in Twenty-First Century Fox Inc (ASX: FOX), $13.7 million in TPG Telecom Ltd  (ASX: TPM), $13.5 million in James Hardie Industries plc (ASX: JHX) and $12 million in ResMed Inc.  (ASX: RMD).

Foolish takeaway

Australian Foundation has an enviable track record of outperforming the market. Over the periods of 1, 3, 5 and 10 years the company’s underlying portfolio has outperformed its benchmark. Given this successful track record, the company’s decision “to be patient at this point” is particularly poignant and suggests that they expect a pullback and opportunity to purchase stocks at more appealing prices in the future.

Australian Foundation has long been a favourite stock for yield-seeking investors; its diversified portfolio of blue chip stocks provides the company with a strong and steady stream of dividends.

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Motley Fool contributor Tim McArthur owns shares in Twenty-First Century Fox.

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