ASX blue-chip shares can be very appealing investments when bought at a good price. Both Qantas Airways Limited (ASX: QAN) and ANZ Group Holdings Ltd (ASX: ANZ) offer intriguing potential.
There is merit to owning some of the biggest S&P/ASX 200 Index (ASX: XJO) shares if they deliver outperformance. If a blue chip can't beat the wider ASX share market, then an investor may as well go with an index fund such as the Vanguard Australian Shares Index ETF (ASX: VAS).
Many investors are attracted to ASX bank shares because of their large dividend yields. But, I think there's more to an investment than just passive income, though that can certainly contribute to total shareholder returns.
We can compare Qantas and ANZ shares in a few areas. Let's explore.
How much competition?
The amount of competition in an industry can affect how much profit a business can make.
If it's easy for a new entrant to come in and compete on price, then margins may be regularly challenged.
Over the last five years, banks have operated in a more competitive environment. Digital banking has enabled the smaller players to challenge the major ASX bank shares, such as ANZ and Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), and National Australia Bank Ltd (ASX: NAB). These days, you don't need a national branch network to provide borrowers with a service.
To demonstrate how much competition there is, here are some of the listed lenders outside the big four: Macquarie Group Ltd (ASX: MQG), Bank of Queensland Ltd (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN), AMP Ltd (ASX: AMP), Pepper Money Ltd (ASX: PPM), MyState Ltd (ASX: MYS) and currently Suncorp Group Ltd (ASX: SUN).
In the ANZ FY24 half-year result, the bank's CEO Shayne Elliott said retail banking was "more competitive than ever". Elliott added that the domestic environment was "expected to remain challenging across the remainder of the year".
Qantas is well-known as Australia's national airline. It does not have much competition, with Virgin and Regional Express Holdings Ltd (ASX: REX) being the only domestic competitors it needs to worry about. There are not that many competitors for international flights into and out of Australia, either, which I think is helpful for Qantas shares.
Less competition for Qantas means the airline can achieve satisfactory airfare prices.
Earnings direction
If a company grows earnings, then its share price is more likely to rise, in my opinion. I think it's one of the most important factors of successful investing.
ANZ's CEO said the Australian and New Zealand economies were "likely to remain subdued", though the bank was well-positioned given its diversity of businesses, prudent management, and strong customer base.
The broker UBS thinks ANZ's profit will fall from $7.4 billion in FY23 to $7 billion in FY24. However, its FY25 profit is expected to recover to $7.3 billion, though that would still represent a reduction from FY23's profit figure. Time will tell if the acquisition of Suncorp Group Ltd's (ASX: SUN) banking operations can help improve its scale and margins.
The banking sector is seeing rising arrears, so that will be something to watch over the next year for ANZ shares.
Qantas is recovering from the impacts of COVID-19 and is now making large profits again, though airfares are not quite as high as they were recently. Broker UBS suggests Qantas' net profit could drop from $1.7 billion in FY23 to $1.49 billion in FY24 and then decline to $1.44 billion in FY25.
However, Qantas did recently reaffirm how it aims to grow the underlying earnings before interest and tax (EBIT) of its loyalty division from a range of $500 million and $525 million in FY24 to between $800 million to $1 billion for 2030
So, it appears neither business is expected to generate profit in FY25.
What about valuation?
Based on UBS estimates, the Qantas share price is valued at 6x FY24's estimated earnings and 6x FY25's estimated earnings.
Looking at the forecasts from UBS for ANZ shares, the bank is valued at 12x FY24's estimated earnings and under 12x FY25's estimated earnings. The ANZ dividend could certainly help with shareholder returns, though Qantas is expected to start paying a dividend, too.
Qantas is clearly on a cheaper earnings multiple. If no major negatives come up for the airline, I think it could deliver a stronger return over the next two or three years.
I'd also choose the airline for the longer term because of the lower amount of competition, the improving fuel economy of planes, and the growing Qantas Loyalty business.
