When I began investing, I was daft enough to buy penny stocks with great ‘stories’ but unproven assets and no cash flows. It was a big mistake. I’d do things very differently if I was starting out today.
My first picks would be proven, cash-generating FTSE 100 businesses, with clear drivers for growth in the coming decades. With this in mind, here are three blue-chips I’d be happy to buy as core holdings for a starter portfolio in 2020.
Defence demand
The current conflict between Iran and the US is a reminder that political, cultural or economic tensions around the world can escalate at any time. But even outside of such worrying times, defence spending remains a key part of any government’s annual budget. As such, I believe defence giant BAE Systems (LSE: BA) is a solid core holding for long-term investors.
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In a trading update in November, the company reiterated its guidance for 2019 of mid-single-digit percentage growth in earnings per share (EPS). City analysts are reckoning on a 6.5% rise to 45.7p, and have pencilled in a dividend of 22.9p.
At a share price of 592p, the price-to-earnings (P/E) ratio is 13 and the dividend yield is 3.9%. I think BAE is well-equipped to maintain both its current EPS growth rate and P/E rating over the long term. If so, and taking into account the starting dividend yield, investors would be looking at a nice total return of around 10% a year.
Growth markets
Following the demerger of its M&G UK asset management business last year, Prudential (LSE: PRU) is now an Asia-focused provider of insurance and savings products. Also expanding in Africa, the long-term appeal of the stock is its excellent exposure to what are exciting structural growth markets.
Due to the M&G demerger, we’ll see a reset of Prudential’s EPS from continuing operations (and dividend) when it announces its results for 2019. Analysts expect EPS of 133.3p and a dividend of 40.1p. At a share price of 1,470p, this gives a P/E of 11 and a yield of 2.7%.
EPS annual percentage growth is forecast to run at mid-to-high single digits in the coming years. Again, taking into account the starting yield, there’s an attractive potential annual double-digit total return for investors. However, I think Prudential will also come to rate on a higher P/E than currently, giving an added boost to returns.
Captive customers
Relx (LSE: REL) will probably be a less familiar name to many readers than BAE or Prudential. However, the case for its inclusion in a starter portfolio is just as strong, in my opinion. Its massive databases and analytical tools in legal, scientific, technical and medical fields (among others) are indispensable for its customers. And with information ever expanding, I believe Relx is well-positioned for long-term growth.
City analysts expect the company to report EPS growth of 9.2% to 92.5p for 2019, and to pay a 45.7p dividend. At a share price of 1,930p, the P/E is 20.9 and the yield is 2.4%.
Relx’s many unique assets and captive customers justify the P/E, in my opinion. I reckon it can maintain annual EPS growth at a high single-digit percentage. And with a reasonable starting dividend yield, and the payout likely to grow at the same high rate, I see this as another stock offering potential annual double-digit total returns for investors.
