Many of us Fools love to invest in a good blue-chip share or two on the S&P/ASX 200 (INDEXASX: XJO). The likes of Commonwealth Bank of Australia Ltd (ASX: CBA) or Telstra Corporation Ltd (ASX: TLS) have been staples of the Aussie dividend portfolio for decades.
But, are we paying too much for these top stocks and not getting enough bang for our buck?
ASX 200 blue-chip shares are expensive
While CSL Limited (ASX: CSL) shares trade at $303.33 per share (at the time of writing), that alone isn’t enough to say if they are expensive ASX 200 blue chip shares or not. The key metric that we can use to determine relative value is the price-to-earnings (P/E) ratio.
The P/E ratio compares the current market price to the historical or forward-looking earnings per share (EPS) of a company. Effectively, this gives us a good measure of how much you’re paying for what you’re getting back in return.
Large dividend shares tend to have lower P/E ratios than growth stocks like Afterpay Ltd (ASX: APT) where much of the value is in its expected future share price growth.
But according to new research by broker JP Morgan covered in the Australian Financial Review (AFR), us Fools could be paying too much for our ASX 200 blue-chip shares.
The ASX 200 is heavily concentrated in Financials and Materials sectors, so the research stripped out the effect of these industries to make it more comparable across the globe.
According to the AFR article, the S&P/ASX 200 Index is trading at a 37.9% premium to the global developing markets with a P/E ratio of 27. That’s a lot of extra money to be paying for blue-chip shares, even if we do have franking credits.
The S&P 500 in the United States trades at a forward P/E ratio of 21 as the next closest in the analysis.
While the analysis is interesting, I wouldn’t hit the panic button just yet. Those P/E ratios are skewed slightly by the number of growth stocks like Afterpay or Appen Ltd (ASX: APX).
The ASX 200 is at an all-time high thanks to strong share price growth from ASX 200 blue-chip shares like CSL and Commonwealth Bank. If you’re confident in the Aussie economy in the medium-term, there could still be good value in buying on the ASX today.
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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and CSL Ltd. The Motley Fool Australia owns shares of Appen Ltd. 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 Scott Phillips.