ASX blue-chip shares: The best of the best for December 2023

I think these blue chips can help our portfolio avoid seeing red.

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ASX blue-chip shares are some of the biggest and best businesses that the ASX stock market has to offer. I'm going to write about three of my favourites which are trading at good value.

The term 'blue-chip' can mean different things to different people. For this article, I'm going to stick to businesses that have a market capitalisation of more than $10 billion. That leaves us with a short list of the largest companies.

Normally I'd cover names like Wesfarmers Ltd (ASX: WES) or Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), but they're not exactly trading at 52-week lows. I'm going to talk about three ASX blue-chip shares that I think have good long-term futures and are materially lower than recent highs, making them opportunities this December.

Coles Group Ltd(ASX: COL)

The Coles share price is down 15% from where it was at the start of August.

It's understandable why the company has fallen – food inflation is reducing (slowing sales growth) and costs are increasing, namely wages. Plus, it's investing in large new warehouses which will help its efficiencies and costs, though it's taking a lot of upfront capital.

But, I think it's the type of business that can benefit from Australia's population growth, long-term inflation of food prices and achieve scale benefits.

After FY24, I think the business will be able to get back to profit growth and dividend growth. In FY25, on Commsec it's projected the business could generate earnings per share (EPS) of 81.1 cents and pay an annual dividend per share of 69 cents, which would put the Coles share price at 19 times FY25's estimated earnings with a grossed-up dividend yield of 6.3%.

I like that the ASX blue-chip share can continue to grow earnings simply by welcoming more customers to its existing stores, adding more supermarkets, expanding product ranges and selling more things online.

Xero Limited (ASX: XRO)

The Xero share price has dropped more than 18% since its 2023 high in July.

Xero has done a great job of growing the business since it listed just over 11 years ago. In prior years, the company had been heavily focused on growth. Now it's trying to balance growth with profitability – in FY24 it's targeting an operating expense to operating revenue ratio of 75%.

In the first half of FY24, Xero saw operating revenue growth of 21%, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of 65% and free cash flow growth of 585%.

If the ASX blue chip share's revenue can continue to grow, and the gross profit margin can creep higher, I think the company will be able to deliver strong profit growth in the long term.

The underlying software is very profitable for Xero with a gross profit margin of 87.5%. It will just take a period of time for the profitability to flow through the financials as it slows down its high level of investing (compared to revenue).

Mineral Resources Ltd (ASX: MIN)

This business is involved in mining services, iron ore mining, lithium mining and gas discovery. The Minerals Resources share price is down 36% since January 2023.

Lithium prices have sunk significantly over the past 12 months, but the iron ore price has risen.

I think there's a compelling future for demand for both commodities (partly thanks to decarbonisation), as well as the ASX blue-chip share's mining services division which can assist in the company's expansion efforts in both iron and lithium production.

In the long term, I think the business can rebound and benefit from scale as it unlocks the full potential of its deposits and demonstrates its ability to produce cash flow.

Motley Fool contributor Tristan Harrison has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited, Wesfarmers, and Xero. The Motley Fool Australia has positions in and has recommended Coles Group, Washington H. Soul Pattinson and Company Limited, Wesfarmers, and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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