3 blue-chip shares for income and growth

Credit: Steven Depolo

With so much coverage available on the largest companies on the stock market, many retail investors believe that seeking bargains at the smaller end of the market is the best way to deliver strong returns for their portfolios.

While this is true to an extent, the fact remains that some of the largest companies on the ASX have an inbuilt advantage due to their size.

Size matters

Chief among these advantages is the ability to generate and reinvest profits at a higher rate of return than smaller competitors, due to economies of scale or size. For example, a large manufacturing plant running at capacity will have a lower cost per unit, and therefore a higher profit margin, than a small plant (all other things being equal).

Another key advantage of larger businesses is that they should theoretically attract higher calibre and more experienced management who can allocate capital more effectively in order to deliver above market returns.

The three stocks in this list have these characteristics, and in addition, have stock specific reasons to consider buying them in 2016.

Packaged success

Amcor Limited (ASX: AMC) is a locally based packaging company, but has operations well beyond the borders of Australia. Packaging companies can have volatile earnings, as they can be leveraged to changing consumer spending habits and discretionary purchasing.

Management recognised this some time ago, and subsequently reorganised the business to have an outsized exposure to more stable and defensive retail purchasing. Amcor now focuses on the packaging of core items including food, beverages, healthcare products and cigarettes.

Management has also deployed excess cash in a share buyback, which is an advantage for shareholders as it increases the earnings per share potential of the remaining shares. It is also an acquirer, with management actively seeking out privately owned packaging companies to add to the broader business, as demonstrated by Amcor’s recent purchase of US-based Deluxe Packages.

Asian strategy

In 2015, one of the best ways to identify a stock that had the potential to outperform over the long term was to scrutinise its strategy for expanding into Asia.

Australia and New Zealand Banking Group (ASX: ANZ) is the only one of the Big 4 banks to have a credible strategy in this space. However, in an example of financial markets sometimes being totally contradictory, this strategy has been highlighted by some analysts as a drag on the share price.

With this key differentiator to its peers, ANZ should be trading at a premium, not a discount. Yield is also an important part of total shareholder return, and the share price falls have put the forecast yield for ANZ at comfortably above 6%, which means that only 4% capital growth is required to deliver a return of above 10% for the year.

Exporting expertise

Ramsay Health Care Limited (ASX: RHC) is the largest non-government hospital operator in Australia. However, the appeal of the stock is the ability that the company and management have identified to export the key competency of the company internationally. That core competency is the running of a profitable private hospital.

Running a hospital is probably one of the most fiendishly complicated undertakings one could imagine, with health, regulatory, safety, compliance and quality concerns all overlapping. These concerns spawn tens of thousands of processes and procedures to manage effectively, while still making an acceptable level of profit and delivering sound patient outcomes.

The shift to a much higher aging population in need of greater health care in many countries is at its early stages, and will not abate. Accordingly, Ramsay has begun to expand into hospital ownership and operation in Britain, China and France.

Ramsay rarely trades at a discount to value, and is a stock to add opportunistically to a portfolio when it falls in price in response to other macroeconomic concerns or on bad days for the share market as a whole.

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Motley Fool contributor Ry Padarath 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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