Motley Fool Australia

2 blue-chip stocks that you should own, but probably don’t

Sometimes adding to your portfolio doesn’t consist of buying a small growth share that you have to monitor regularly to see if it fulfils its potential. Sometimes you want a solid earner that you can buy, hold, and forget about – except when the time comes to collect your dividends!

The search for such a share is made harder by the fact that most blue-chip stocks receive heavy market coverage owing to their role as the biggest stocks in the Australian market. I’ve found two recently, however, that pay an acceptable dividend and look to be fairly valued, if not slightly cheap considering their future prospects.

Goodman Group (ASX: GMG)

Though investors who held this share through the GFC (where it dropped $25) may be a little gun-shy, Goodman Group has been a solid performer in the years since. Consistent growth in operating profit (the groups preferred measure of profitability) over the past four years is impressive and looks likely to continue into the future with the group’s strong development pipeline and foreign currency exposure. 48% of Goodman’s revenues are earned in foreign currency which makes the company even more enticing to the Australian investor.

Regular readers will know that I am very bullish on the Chinese growth opportunities for Australian companies over the coming years, and although Goodman is not mentioned in that article, it is yet another company perfectly positioned to benefit. With over 4 million square metres in their ‘land bank’ in China, as well as continuous demand thanks to an industrial land shortage, Goodman is primed to grow earnings for many years to come. It also pays a 4.1% (unfranked) dividend which increases fairly consistently year-on-year. What more could you ask for?

Incitec Pivot Limited (ASX: IPL)

Incitec Pivot should be better known than Goodman Group, thanks to its widespread Australian fertiliser and explosive operations. Incitec is a large-scale industrial chemicals manufacturer supplying the explosives and agriculture industry worldwide, with operations primarily in Australia, Indonesia and the US. A fairly disappointing result occurred in 2013 with a decline of 26% in per-share earnings (excluding material items) thanks to poor fertiliser prices, a higher Australian dollar and increased cost-saving measures by mining companies.

The future years look to be considerably better however with an increase in production at the Moranbah and Louisiana ammonium nitrate plants looking promising, and the possibility of further weakness in the Australian dollar heading towards 2015. With these factors in mind, Incitec looks modestly undervalued and its dividend of 3.4% (75% franked) should increase in line with growing earnings.

Foolish takeaway

Don’t bet against China’s continued influence on the Australian economic landscape. Just because their mining imports look to be slowing, doesn’t mean there aren’t plenty more opportunities for companies like Goodman Group to benefit. Incitec Pivot has a similarly key role as a provider of explosives and fertiliser, two key ingredients that are going to be powering resource collection in the future. I’d be willing to bet these two companies aren’t in your portfolio – and if that’s true, maybe it’s time for some new blood.

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Returns as of 27th November

Motley Fool contributor Sean O’Neill doesn’t own shares in any company mentioned.

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