How many blue chip shares do you own?
If you're anything like plenty of other Australian investors, there's a good chance your portfolio is chock-a-block full of them!
But while many of Australia's blue-chip shares have proven to have been great investments in the years (and even decades) gone by, investors need to be careful not to become too reliant on them.
Investors around the country were caught off guard when Woolworths Limited (ASX: WOW) began its sharp decline in April 2014, going from almost $39 a share down to roughly $20. Indeed, it was hard to believe one of Australia's biggest and greatest companies could collapse in on itself in such fashion, losing investors lots of money in the process. But it happened, and other blue chips aren't necessarily immune.
That isn't meant as a scare tactic, by the way. But it is meant as a reality check. After all, it can be easy to simply pile your money into shares of well-known businesses, or ones that you're intimately familiar with, but, as you can see with Woolworths, that isn't always necessarily the best move to make.
BHP Billiton
One company that I believe is a risky investment right now is mining heavyweight BHP Billiton Limited (ASX: BHP). It was only early last year that the company's share price fell to a multi-year low of around $14 due to plunging resources prices. But it has recovered nicely in the time since, rebounding more than 60% thanks to positive movements in the commodities space.
Although commodities have recovered some of their losses however, there is still significant uncertainty about where they will go next. For example, the oil price fell more than 5% overnight just last week, and the iron ore price has fallen from nearly US$100 a tonne to US$60 a tonne more recently. BHP has reduced its cost base significantly, and it has divested its non-core assets [resulting in the creation of South32 Ltd (ASX: S32)] but the fact remains: BHP, like other resources, remains at the mercy of commodity prices. If prices fall from here, so too could the BHP Billiton share price.
Commonwealth Bank of Australia
The Commonwealth Bank of Australia (ASX: CBA) share price has delivered huge returns to investors since its initial public offering (IPO) just over 25 years ago – both in the form of dividends and capital returns. But again, just because the bank has generated huge returns for investors in the past, doesn't mean it has to in the future.
With a market capitalisation of more than $140 billion, there are limits to how fast the country's biggest bank can grow. It's also facing tough competition from the country's other major banks and has just been slugged with a new Bank Levy which it believes could cost it $315 million per annum (or $220 million after tax). The levy itself represents a small percentage of the group's overall earnings, but there is every chance it will try to pass those costs onto consumers or shareholders. If it chooses to pass the costs onto shareholders, it could impact the dividend by around 13 cents per share, with bank dividends already receiving plenty of scrutiny.
Coca-Cola Amatil Ltd
Coca-Cola Amatil Ltd (ASX: CCL) manufactures and distributes bottled beverages in Australia (as well as New Zealand, Fiji, Indonesia, Samoa and Papua New Guinea) and might seem appealing to some investors due to the strength of the brand in its name.
But Coca-Cola Amatil has been struggling to remain relevant, in my opinion. Indeed, company growth has been flat, with earnings (EBIT) and volumes both declining in its key Australian Beverages market. Although the company also sells other products such as coffee and bottled water, I do worry that the company may struggle to adapt to the growing consumer health trend, with many individuals (me among them) electing to kick the sugary drinks for good.
The Coca-Cola Amatil share price has declined over the past five years, and I wouldn't put my money behind it as a new idea in 2017 either.
