Blue-chip stocks play a vital role in any portfolio. Not only do they provide less volatility, but usually they also distribute a generous dividend which acts as a regular stream of income for shareholders.
But with the S&P/ASX 200 (INDEXASX: XJO) Index sitting at its highest point since the Global Financial Crisis, it remains as important as ever that investors pay attention to the price they are willing to pay for them. Many have become overpriced and a buy today could result in inferior returns for years to come (if not years of losses). Below are four blue-chip corporations that I believe should be avoided right now…
Commonwealth Bank of Australia (ASX: CBA): Although I won't dare question the quality of the bank, I recently wrote an article outlining three primary reasons why I believe investors should sell their CBA stock. Indeed, the bank recently announced a record annual profit of $8.7 billion and boosted its full-year dividend to $4.01 per share, but I believe earnings could come under pressure in the coming years. Trading on a P/E ratio of 15.2, Commonwealth Bank is trading at a dangerous level right now.
Westpac Banking Corp (ASX: WBC): Westpac is in the same boat as Commonwealth Bank. Not only does it trade on a very high premium, but most analysts also expect Australia's second largest bank to grow earnings at a very sluggish pace over the next few years. An eventual increase in interest rates could also see bad debt charges rise significantly.
Woolworths Limited (ASX: WOW): The retailer has been an outstanding performer for shareholders over the last two decades and could continue to recognise growth through its new Masters home improvement chain. However, Woolworths' earnings from its main supermarket business could become more limited over the coming years, especially as other international chains like Aldi and Costco continue to expand throughout Australia. The company trades on a projected P/E ratio of 18.9x and offers a fully franked yield of just 3.7%, which is well below what other blue-chips are offering. If I held Woolworths' shares, I wouldn't necessarily sell but I certainly wouldn't buy right now either.
Telstra Corporation Ltd (ASX: TLS): Telstra is Australia's leading telecommunications business and is in a prime position to benefit from the rapid expansion of cloud computing and Machine-to-Machine (M2M) technology. While Telstra would be the first company I would buy from this list, I am certainly reluctant at its current price. It recently hit its highest level in more than a decade at $5.76 while it is currently trading on a P/E multiple of 15 with a market capitalisation of just over $71 billion. A pullback in price could certainly see me hit the "buy" trigger.
A high-yielding alternative you don't want to miss
One of the most attractive things about blue-chip stocks are their generous dividend yields. While each of the above mentioned companies are trading on excessive premiums right now, The Motley Fool's top analyst, Scott Phillips, has recently uncovered an incredible alternative.
