This is What a Blue Chip Looks Like

I scratch my head when I see pundits on TV telling investors to invest in Blue Chip dividend paying stocks. That’s a recipe for dead money. The conservative stocks with a good yield don’t have much, if any, upside right now.

The time to get into the Blue Chips was in 2012’s Q4, when the stocks were on sale and had solid upside potential. Honestly, at the time, my mouth was watering at some of the upside potential stocks like Microsoft, Illinois Tool Works, JP Morgan and McDonald’s (MCD) had.

Then in 2013’s first half the Blue Chips took flight and lead the stock market. They jumped until they became fully valued, then the stock market took its attention to growth stocks, which carried the market during the 2nd half of last year. Now, the Blue Chips are not growing profits enough to make the stocks go any higher.

One Year Chart

McDonald’s is a perfect example of this. In November 2012 MCD was $84, then by April 2013 it was $102, that’s 20% for a company growing profits at 8% a year long term, quite a move. This one-year chart here shows April 2013 on the left side (note the pop over $100).

The trouble then was the stock was too high, and couldn’t go higher. The P/E was pushing 19 and MCD isn’t a fast enough grower to carry a P/E that high. So the stock settled down. Notice quarterly profit growth (bottom) has been between 2% and 6% during the last year. More of the same is expected (Estimates). This isn’t a stock to get excited about.

Fair Value

To get my Fair Value on MCD, I took the expected long-term growth rate of 8% and added the yield of 3%. Then I added a premium to account for certainty (you know McDonald’s is doing business every day) and consistency (profits up every year except one during the last decade). MCD has also raised its dividend every year since 1976.

I think MCD’s fairly valued at 16 times earnings. Right now the P/E is 17, and that’s only because the stock jumped a couple of weeks ago. There’s nto much upside into 2015 either. To me this stock si dead money, and won’t go anywhere for a while.

Sharek’s Take

Sometimes Blue Chip dividend paying stocks are good values that can give investors decent gains on their investments. But this isn’t one of those times. Right now conservative stocks like McDonald’s are selling where they should be and don’t have much upside potential.