5 high-quality blue chip shares trading at bargain prices

If you’re looking for quality shares to add to your portfolio, or even to top up on some you already own, here are 5 ideas for you.

Recently I ran a filter on ASX-listed companies with market caps of more than $1 billion, a return on equity (ROE) above 15%, as well as strong earnings per share growth over the past 5 and 10 years. I was also looking for companies with debt/equity ratios of less than 40%, and here are the results.

Adding a value filter – I was also looking for companies that appear cheap on both a P/E ratio and Enterprise Value to EBITDA (EV/EBITDA) basis.

I should note that the two banks have been included, but financial companies’ debt/equity ratios are meaningless when compared to ‘normal’ industrial companies, as are their EV/EBITDA ratios.

Westpac Banking Corp (ASX: WBC)

Trading on a forecast P/E ratio of 13x earnings and with an ROE of 15.6%, Westpac is often regarded as our second-highest quality bank. Many investors would also be aware of the company’s consistent fully-franked dividend, which at the current price of $32.53 is around 5.7%.

There’s no doubt the banks face a multitude of risks they haven’t had to face in the past few years, including potentially more capital raisings, higher interest rates on wholesale borrowings and rising bad debts, as well as a downturn in credit growth associated with the weakening property market, so that will be something to watch.

Commonwealth Bank of Australia (ASX: CBA)

Australia’s highest-quality bank, with the highest returns on equity, is currently trading at $76.31, after pulling back from a high of $96.69 almost a year ago – and a forecast P/E ratio of 13.6x. Part of the price fall can be attributed to shares issued at a discount last year. CBA raised ~$5 billion through the issue of shares at $71.50 each, and like Westpac above, could be forced to raise even more this year, and faces similar risks.

For investors who are taking a long-term view, now might be the perfect time to top up or start an investment in CBA.

Telstra Corporation Ltd (ASX: TLS)

Australia’s largest telecommunications company, Telstra derives much of its earnings from its mobile business, but also has a number of much smaller businesses that could generate much need growth in revenues in future, including its Network Application Services and eHealth divisions. Telstra is trading on a forecast P/E ratio of 14.7x and sports a dividend yield of 6% at the current price of $5.16. The biggest risk for investors is if Telstra is unable to generate any growth and makes a large acquisition which turns out to be a waste of shareholders’ funds.

JB Hi-Fi Limited (ASX: JBH)

Investors have constantly written off JB Hi-Fi over the years, as many of the products it sells move into digital format, or pure-online competitors are expected to steal much of the company’s business. So far that hasn’t happened, and JB Hi-Fi has constantly adapted to structural changes in the consumer electronics and retailing landscape. I expect that to continue – walk into any JB Hi-Fi store in any shopping mall and most of the time it is crammed full of customers. At the current price of $23.10, JB Hi-Fi is trading on a forecast P/E of 15.3x and paying a dividend yield of just over 4%. For a company generating an ROE of 37.6%, that appears cheap.

Flight Centre Travel Group Ltd (ASX: FLT)

The bricks-and-mortar travel agent keeps going from strength to strength, including increase its total transaction value by $1 billion in just the past six months. Over the past 10 years, Flight Centre has delivered compound earnings per share growth of 13% (annually). With profitable operations in more than 10 countries, expansion into complementary sectors such as tours, budget travel and additional online services, Flight Centre is likely to continue growing earnings for many years. With a forecast P/E ratio of 15.7x, a dividend yield of 3.7%, a return on equity of 22.5%, no debt and a growing cash balance, shares look attractive.

Foolish takeaway

All five companies have their risks, but for long-term investors, now might be the perfect time to take a closer look.

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Motley Fool writer/analyst Mike King owns shares in Telstra Corporation and Flight Centre. You can follow Mike on Twitter @TMFKinga

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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