Is Brambles Limited a blue chip buy at this share price?

Leading pooling solutions provider of reusable pallets, crates and containers, Brambles Limited (ASX: BXB) has continued to impress with the share price gaining 7.2% over the past month to finish last week’s trading session at $10.90. In comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen 2.7% over the month.

For investors who like to fill their portfolio with high-quality blue chip stocks, Brambles is most likely a core holding. It certainly makes sense for conservative, long-term investors to own Brambles. Here are four reasons why:

1. The critical role and diversified customer base that Brambles services provides a “blue chip” level of defensive earnings quality.

Brambles provides shareholders with exposure to the fast moving consumer goods (FMCG) sector where the group plays a critical role facilitating the movement of literally billions of goods through supply chains using Brambles’ pooling solutions. The group’s scale means they are utilised by many of the largest and most successful FMCG companies in the world such as Heinz and Nestle.

2. Brambles’ earnings and business quality and historic returns are above average – just what an investor desires in a true blue chip stock.

Brambles’ return on capital invested in FY 2015 was a solid 15.7% but still below management’s stated aim of growing this metric to 20% by FY 2019. Meanwhile, total shareholder returns (TSR) over the past five years have been an impressive 13.6% per annum.

3. A hallmark of blue chip stocks is a steady, growing and maintainable dividend.

Since FY 2011 the dividend has grown from 26 cents per share (cps) to 36.5 cps in FY 2015. Pleasingly, consensus forecasts show the dividend increasing to 54.2 cps by FY2018.

4. A sustainable competitive advantage creates a ‘moat’ around Brambles business and is another key attribute of a blue chip company.

Brambles unique position within the supply chain has enabled the group to build a sustainable competitive advantage that in turn drives a positive feedback loop of value for customers. This competitive advantage produces attractive rates of economic returns for shareholders and attractive rates of growth relative to the sectors in which Brambles operates.

Positive future outlook

The recent first quarter trading update showed an 8% rise in sales on a constant currency basis with containers the standout division, contributing 19% growth on the prior corresponding quarter.

With the stock trading on a price-to-earnings multiple of around 20 times and considering the above attributes of the group the stock appears to remain a sound investment even at today’s price.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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