What does it take to be a blue chip company?

A blue chip company is one that is considered a safe investment. It will not have wild swings in its stock price, especially to the downside, and it pays a decent dividend. Blue chip companies are in established businesses. They are large and liquid enough to survive in bad times and thrive in good times. In this article, find out all that it takes to be a blue chip company.

Blue chip metrics

A blue chip stock is judged by the company's dividend, debt, earnings, revenues and profit margins. Dividend Most blue chip shares pay at least a 2% dividend - some considerably higher. However, some tech companies can be considered blue chip even though they use their cash to grow instead of distributing it to shareholders. Debt Many blue chip companies have cash on the balance sheet. If there is debt, it should be minimal enough to be easily handled by the cash flow. Revenue and earnings The revenues of blue chip companies typically grow at a modest, but steady pace. The earnings should grow consistently, though in times of economic slowdown, earnings may be flat or even negative. Profit margin Blue chip companies typically have stable or slightly improving profit margins that are at or above the average for their industries.

Some blue chip companies

ExxonMobil (XOM) Of all the companies that are considered blue chip, Exxon tops the list. Nobody thinks that the oil business will fade any time soon. The company has stable profits, revenues, dividends, and minimal debt. CSX Goods always have to be moved from one place to another. The railroad companies will be necessary to the economy for as long as one can predict. CSX is a leader in the rail industry. They have dips in profits when the economy is in recession, but the dividend is secure, the debt is well under control and the company is large enough to survive any economic downturn. Microsoft (MSFT) Tech stocks are considered risky because technology changes rapidly. However, a company like Microsoft is considered blue chip because its products are so integral to the working of the economy. Microsoft has a lot of cash on the balance sheet to see it through any hard times. Though it has no dividend, Microsoft has consistent earnings and revenues, and will use its cash to grow. Walmart (WMT) Retailers like Walmart feel the economic cycle more than other sectors. However, a large company as Walmart can weather the economic downturns and thrive in good economic times. Its dividend is modest, but its debt is minimal when margins hold steady.