If you're building a quality ASX blue chip share portfolio then I think there are a couple of names that I think should be in there.
There are plenty of ASX 20 shares that I wouldn't want to own in my portfolio because I'm not confident about their longer-term growth prospects. Names like BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), Scentre Group (ASX: SCG) and Woodside Petroleum Limited (ASX: WPL) look challenged to me.
I don't think it's worth buying a blue chip just because it's a big name. It needs to have growth potential in my opinion.
That's why I'm attracted to these two names:
Wesfarmers Ltd (ASX: WES)
I think Wesfarmers could be the best ASX blue chip share with how it operates. It has a number of operating businesses including Bunnings, Officeworks, Kmart and Catch.
I like the business model because it allows Wesfarmers to buy businesses in whatever industry management think is a growth opportunity. For example, not too long ago it invested into Kidman Resources, a lithium business. Retail and lithium mining are completely different – but both could be good investments for Wesfarmers to pursue.
COVID-19 has been tough for some of Wesfarmers' businesses like Target with the trading restrictions, but other sections have seen strong growth in FY20 like Bunnings, Officeworks and Catch. Bunnings benefited from a surge of households doing DIY projects, its revenue grew by 13.9%. Officeworks saw lots of people needing home office supplies, this helped revenue rise by 20.4%. Catch, as an online retailer, benefited from the rocketing ecommerce growth with grass transaction value growing by 49.2% since the acquisition.
The ASX share seems well placed to grow whatever happens next with COVID-19 and the economy. It has a solid balance sheet and a reliable dividend. I'm interested to see what happens in FY21 – a vaccine could be very beneficial for sentiment regarding the medium-term prospects for retail.
At the current Wesfarmers share price, it's trading at 27x FY22's estimated earnings.
Macquarie Group Ltd (ASX: MQG)
Macquarie is Australia's global investment bank and one of the biggest financial businesses on the ASX.
It has shown good resilience during COVID-19 so far. As one of the world's biggest infrastructure managers, it generates attractive recurring revenue from the management fees.
In the first quarter of FY21 Macquarie reported that its group operating net profit was only slightly down on the first quarter of FY20. There were mixed trading conditions for the different segments. For example, whilst there were lower numbers of acquisitions and initial public offerings (IPOs), there were increased numbers of capital raisings to shore up balance sheets.
The reason why I think it's one of the best ASX blue chip shares around is because of its global nature and its diversification. Unlike most financial shares, Macquarie has different segments – its earnings aren't reliant on loans.
Macquarie generates two thirds of its earnings outside of the domestic Australian and New Zealand market. Most ASX20 shares are largely reliant on Australia (and perhaps China) for their earnings.
Macquarie can decide to invest and expand into whatever country or industry it thinks is a good growth opportunity. The investment bank's Green Investment Group continues to grow with new renewable energy projects.
At the current Macquarie share price it's priced at 16x FY22's estimated earnings.
Foolish takeaway
I think both of these ASX blue chips offers investors compelling diversification and good growth potential. They both have good dividend credentials too.
At the current prices I'd probably more inclined to go for Macquarie – Wesfarmers has had a strong run since the COVID-19 crash. However, I'd be more confident about owning Wesfarmers for the ultra-long-term because it could grow into any industry with its business model. I think Wesfarmers will be a solid dividend share for a long time to come.
