ASX blue-chip stocks are where we can find some of the strongest businesses, which are usually leaders in their sector. I'm going to talk about three of the best opportunities I'm seeing in the S&P/ASX 100 Index (ASX: XTO).
When companies have a leading product and market share, they have better pricing power and brand power, which can be a good driver of profit growth.
Below are three of the ASX blue-chip stocks that I think are good value this January.
Telstra Group Ltd (ASX: TLS)
Telstra is the leading telco business in Australia. The company says that 5G data demand is growing at 30% per annum and boasts that it has the largest and most reliable mobile network – in FY23, 85% of the population was covered and it's targeting 95% by FY25.
The business is benefiting from structural population growth, with 1% to 2% per annum between 2023 to 2027. Telstra is also benefiting from an annual price review, with an option to review with CPI, driving average revenue per user (ARPU) growth.
Telstra's subscriber numbers continue to grow, so it's benefiting from operating leverage because more users are using the same infrastructure, which leads to rising margins.
The ASX blue-chip stock is expecting to grow underlying earnings before interest, tax, depreciation and amortisation (EBITDA) again in FY24 and this could help dividend growth.
According to the estimates on Commsec, the Telstra share price is valued at under 22 times FY24's estimated earnings with a possible grossed-up dividend yield of 6.6%.
Xero Limited (ASX: XRO)
Xero is one of the biggest accounting software businesses in the world. It has a major presence in Australia and New Zealand, and it's growing in the UK, North America and other markets such as South Africa.
In the FY24 first-half result, Australia added 122,000 subscribers, New Zealand added 17,000 subscribers, the UK added 40,000, North America saw 12,000 added, and the 'rest of the world' saw 13,000 subscribers added. Xero's total subscribers rose 13% to 3.9 million in HY24.
The ASX blue-chip stock has been increasing prices for subscribers in New Zealand, Australia and the UK, which is helping the ARPU. In HY24, ARPU rose 6%.
Xero has an extremely high gross profit margin of 87.5%, so any extra revenue is very beneficial for its finances. In HY24, operating revenue increased by 21%, adjusted EBITDA grew by 65%, and free cash flow improved by 585% to NZ$107 million.
The Xero share price is still down by close to 30% from November 2021, and it has grown its revenue a lot since then – I think this is a decent time to invest, though it's not as cheap as it was 12 months ago.
Lottery Corporation Ltd (ASX: TLC)
This business operates Australia's main lotteries including OZ Lotto and Tatts Lotto.
The Lottery Corporation share price is down 15% from August 2023, despite the company's ongoing growth – in FY23 turnover rose by 1.3% and underlying EBITDA rose 4.2%.
Lottery Corporation can increase the prices of its lotteries (and has). It's also benefiting from a growing amount of tickets being sold online, which comes with a stronger profit margin for the ASX blue-chip stock.
The business could be a solid option for dividend income with a high dividend payout ratio. According to Commsec, it could pay a grossed-up dividend yield of 5% in FY24.
