What are ASX large-cap shares?
Large-cap shares are generally well-established businesses with a stable history, so investors see them as less risky.
Of the more than 2,000 companies listed on the Australian Securities Exchange, large-cap shares have the largest market capitalisations. The 50 biggest ASX shares boast market caps ranging from the tens of billions to more than $200 billion.
There are no hard and fast rules about what constitutes a large-, mid-, and small-cap ASX share. It is generally agreed, however, that the 50 biggest stocks on the ASX by market cap are large-cap shares.
The next 50 biggest shares on the ASX by market cap are considered mid-cap companies. These have market capitalisations between $2 billion and $10 billion. ASX small-cap stocks are those that sit outside the S&P/ASX 100 Index (ASX: XTO).
Why invest in them?
Large-cap stocks can provide investors with unique advantages. These include certainty in valuations, steady dividend payments, and stability.
Really large cap companies are typically giants of their industries and well-established, which means they are less likely to face an economic circumstance that forces them to stop trading or renders them insolvent. This means large-cap shares can add valuable stability to a diversified portfolio.
But with that stability comes an obvious drawback – because they are already mature, established leaders in their respective industries, large caps (usually) don't have much more room for explosive growth. Which means they're unlikely to set your portfolio on fire (although it's also unlikely they'll decline much in value either).
One other advantage of arge-cap shares is that they will almost always pay dividends. These can be a valuable source of passive income – or, if reinvested and left to compound for long enough, can even add up to an impressive total return..
So, in summary, large-cap shares may not have the same growth potential as smaller-cap shares, but they also carry less risk of loss to investors. Because of these risk and return characteristics, large-cap stocks tend to be favoured by income investors and those with a relatively conservative risk profile.
Top large-cap shares on the ASX
The three largest shares on the ASX (below, ranked by market cap from high to low) are involved in the mining, banking, and pharmaceutical/biomedical industries.
|BHP Group Ltd |
|BHP is one of the world's top commodities producers, with operations in |
five Australian states, as well as Canada, Chile, Peru, the United States,
Columbia and Brazil
|Commonwealth Bank of Australia |
|CBA is Australia's biggest bank, providing a range of financial products |
and services to retail, business, and institutional customers
|CSL Limited |
|CSL creates and manufactures vaccines and disease treatments. It is one|
of the world's largest influenza vaccine providers and operates one
of the biggest plasma collection networks
The largest company on the ASX by market capitalisation, BHP is a commodities producer, mining iron ore, copper, nickel, potash, and metallurgical coal. It has mining assets across Australia and the Americas, with its business spread across more than 90 locations worldwide.
The company is focused on the resources the world needs to grow and decarbonise. These include nickel for electric vehicles and copper for renewable infrastructure.
In late 2022, BHP entered into a scheme of arrangement to purchase 100% of OZ Minerals for an enterprise value of $9.6 billion. The acquisition was completed in May 2023, adding to BHP's copper and nickel portfolio (both metals required for electric vehicles and green energy).
BHP reported eye-watering earnings before interest, tax, depreciation, and amortisation (EBITDA) of US$28 billion this financial year – but that was down 31% from the company's record FY22 EBITDA of $41 billion. The company stated that the year-on-year decline was attributable mainly to lower commodity prices and cost inflation.
BHP still sees more growth on the horizon though, arguing that its portfolio is positively leveraged to megatrends (including decarbonisation), with a world-class resource base across a differentiated set of commodities.
Commonwealth Bank is a leading provider of integrated financial services. It provides retail, business, and institutional banking, superannuation, insurance, and share-broking products and services. The bank employs some 49,000 people and serves 15.9 million customers. In FY23, Commonwealth Bank reported net profit after tax (NPAT) of $10,188 million, up 5%.
Banks' profits tend to increase when interest rates rise, as they can pass on more of the rate increases to their borrowers than their depositors. But as rates peak bank margins begin to contract again, especially as more customers start defaulting on their loans. This makes the period we're in now a particularly interesting one for the banking industry — and one that might test the strength of many of their balance sheets.
CSL started out as Commonwealth Serum Laboratories in 1916. It was established to service the health needs of the nation, which was isolated by war at the time. Over the ensuing years, CSL provided Australians with access to medical advances including penicillin, and vaccines against influenza, polio, and other infectious diseases.
Today, CSL comprises four business arms:
- CSL Behring, which focuses on rare and serious diseases
- CSL Seqirus, which is one of the largest influenza vaccine providers in the world
- CSL Plasma, which operates one of the world's largest plasma collection networks
- CSL Vifor, which is a leader in iron deficiency and nephrology.
In FY23, CSL delivered NPAT of $2.19 billion, down 3% on the prior year (although up 8% on a constant currency basis, which removes the impacts from foreign exchange rates). It expects revenue growth of between 9% and 11% in FY24..
Pros of investing in large-cap shares
Consistency: Large-cap companies are well-established and financially stable. They tend to have extensive networks, which allow them to consistently provide their products and services throughout economic cycles.
Transparency: Large-cap companies have usually been in business for a long time. More data is available on their actions and financial activities than for newer or start-up companies. ASX-listed companies are required to report their financial results periodically. Investors can assess these reports via the ASX website1 or here at the Motley Fool2 to help them make investment decisions.
And the cons…
Expensive: Compared to small- or mid-cap stocks, large-cap shares can be relatively expensive. This is because large-cap shares are more discoverable and subject to higher demand.
Low capital appreciation: Large-cap stocks tend to respond more mildly to market fluctuations than mid- or small-cap stocks. This means large-cap share values don't tend to rise as much as those of small- or mid-cap shares during a bull market.
Are ASX large-cap shares a good investment?
Whether ASX large-cap shares are a good investment for you will depend on your financial situation and investment goals. Large-cap shares can add stability to a diversified portfolio of ASX stocks and will likely pay dividends.
It is important to remember that although the names of large-cap shares may be widely known, prospective investors must still assess how particular large-cap stocks fit within their portfolio. Large-cap stocks can be helpful in balancing out volatile growth stocks, as large-cap share prices tend to move slowly.
Before making an investment decision or doing any trading, make sure you understand the circumstances in which you should invest in Australian shares.
For investors who prefer not to pick individual shares, there is an exchange-traded fund (ETF) that provides exposure to the 50 biggest large-cap shares on the Australian share market – the SPDR S&P/ASX 50 (ASX: SFY).
An ETF trades on the stock market like a regular share, but it's really more like a pooled investment vehicle. It takes the money it raises from its investors and uses it to buy a portfolio of assets.
This means that buying a unit in the fund is like buying a little piece of that whole portfolio. ETFs can be a great way for beginner investors to get the benefits of diversification without the high transaction costs.
- Additional reporting: Rhys Brock