Exploring the Potential of British Blue Chip Stocks

When examining the top contenders on the UK stock market, one may find it challenging to feel enthusiastic. Major players like Lloyds Banking Group, Shell, and National Grid often lack the captivating allure of innovative companies.

Compared to the excitement seen in the US market, where tech giants such as Apple, Microsoft, and Amazon drive significant growth, British companies may appear relatively plain. The so-called “Magnificent Seven” (Apple, Microsoft, Amazon, Nvidia, Tesla, Alphabet, and Meta) have propelled the S&P 500 to impressive heights over the last decade, making them widely recognized.

This discrepancy is highlighted by the performance metrics, with the S&P 500 surging by 86 percent over the past five years, compared to a mere 35 percent increase for the FTSE 100. This reality has led to a lack of UK-focused investments in my portfolio, aside from one British blue chip: BAE Systems, which is involved in defense.

However, I’m starting to reconsider the potential benefits of investing in the FTSE 100 heavyweights. The UK market currently presents an appealing valuation, with the FTSE 100’s forward price-to-earnings ratio sitting at 12.2, as noted by wealth manager Jason Hollands, while the S&P 500 stands at 21.1.

Stocks with reasonable valuations generally exhibit lower volatility, enabling them to withstand negative earnings reports without a dramatic decline in share prices. Overvalued stocks, on the other hand, could lead to market bubbles where panic selling occurs at the first hint of bad news. Purchasing companies at attractive prices can enhance profitability.

The leading sectors in the UK, including financials, industrials, healthcare, and energy, are essential components of the economy, making them unlikely to vanish. These are foundational industries that tend to withstand economic hardships.

Dividends are another appealing aspect of the UK equity landscape. The FTSE 100 boasts a yield of 3.41 percent, significantly higher than the S&P 500’s 1.3 percent, with some UK stocks yielding over 5 percent. M&G has the highest yield at 9.2 percent, while Legal & General, Phoenix Group, and Taylor Wimpey also offer yields of 8 percent or more.

According to Hollands, although the UK’s primary sectors may seem less exciting than those in trendy fields like AI, they fulfill essential human needs. Solid companies can be found at fair valuations, delivering attractive dividends, and many of them are actively purchasing their own shares.

In a diverse portfolio that aims for long-term stability, incorporating leading UK companies should indeed be considered.

So, which British blue chip should you choose?

Graham Ashby, a UK fund manager at Schroders, has highlighted Howdens, a kitchen company, as a strong candidate. He notes the average age of kitchens in the UK has risen to 13.4 years, up from 10 in 2010, indicating that kitchen renovations are slowing during the cost of living crisis.

With falling mortgage rates anticipated to revive housing transactions, Howdens is well-positioned to capitalize on this trend, commanding a 20 percent share of the kitchen market.

On the other hand, Hollands recommends Beazley, a major insurer recognized as a pioneer in underwriting cyber risk—this is increasingly relevant for companies and investors following the £300 million impacts of the cyberattack on Marks & Spencer.

Jack Fletcher-Price, an equity analyst at Morningstar, points out that Persimmon, a housebuilder, appears undervalued by 42 percent relative to market expectations. He believes the share price does not reflect the positive outlook for UK homebuilders in the coming decade, fueled by government initiatives to boost housing development.

Fletcher-Price explains that Persimmon’s focus on affordable housing and first-time buyers positions it well amidst ongoing housing affordability challenges and a governmental push for increased homeownership.

Additionally, Richard Hunter from Interactive Investor advocates for Prudential, an insurer and pensions firm, citing the company’s renewed strategy and focus on Asia and Africa, which present significant growth opportunities.

Hunter notes that Prudential aims for ambitious business profit growth of 15 to 20 percent annually by 2027, and despite a 25 percent decrease in share price over the last two years, the stock has gained 33 percent this year. He emphasizes that there remains substantial potential for further growth.

Whether it’s a kitchen supplier, an insurer, a housebuilder, or a pensions provider, while none may rank as particularly glamorous investments, exploring one for inclusion in my portfolio could be worthwhile.