The term 'blue chip' in many ways gets used far too liberally – however Brambles Limited (ASX: BXB) is one company that truly does deserve the title.
Having spun-off its slow growing records management business into the separately listed Recall Holdings Ltd (ASX: REC) late last year, Brambles' management can now solely focus on maximising shareholder value in the pallet and container pooling businesses. So far investors appear pleased with the demerger sending Brambles stock price to a new five-year high.
Despite a weak global economy, Brambles recent third quarter trading update highlights the strength of the firm's supply-chain logistics offering. On a constant currency basis, growth in sales of 7% was achieved. Management also reaffirmed earlier profit guidance for US$930 million to US$965 million.
Here are three reasons why Brambles deserves a long-term position in your portfolio.
1) The company is set to continue to grow at an above average rate. A major reason investors can expect solid growth rates from Brambles is because of the value proposition the company provides to its customers. One way to maintain a market-leading position is to provide a service which is value-adding to your customers – the scale of Brambles pooling operations makes this a possibility.
2) Much like retailer Woolworths Limited (ASX: WOW), Brambles diversified customer base provides a steady and sticky revenue stream. This boosts the defensive characteristics of the stock and is one of the key reason Brambles meets the criteria of 'blue chip.'
3) Because Brambles enjoys strong growth prospects a significant portion of profits are re-invested back into the company rather than paid out to shareholders in the form of dividends. While some investors are focussed on income, in reality a business which can compound retained earnings at an acceptable rate is an even better option. It also means that in the future if there are less growth opportunities available to management then the board can substantially raise the dividend.
