S&P/ASX 200 Index (ASX: XJO) blue chip shares are good options to help deliver long-term returns and stability for your portfolio in my opinion.
Blue chips are seen as safer shares and are usually the leaders in their industry. Some people may think that blue chips have low growth potential. I think that's true about some blue chips like BHP Group Ltd (ASX: BHP) and Woolworths Group Ltd (ASX: WOW) that are already huge players, but there are other blue chips that I think are good long-term buy ideas:
A2 Milk Company Ltd (ASX: A2M)
A2 Milk is one of the leading infant formula businesses. The company continues to grow its market share in the key China market. In the FY20 half-year result A2 Milk said that it grew its China infant formula market share from 5.4% in December 2018 to 6.6% in December 2019.
The company has remained resilient in the face of the COVID-19 pandemic with people stocking up on A2 Milk's products. The business is high quality and the products are also seen as high quality. I think quality will win out during this pandemic.
The ASX 200 share saw such strong trading that its earnings before interest, tax, depreciation and amortisation (EBITDA) margin is now expected to be in the range of 31% to 32%, rather than the goal of 30%. I think that shows that as the business grows its margins can improve further.
It's steadily growing its market presence in the US and China, which should allow for bigger profits over the years. Plus, there are plenty of other countries like Canada to generate earnings from in the future.
At the current A2 Milk share price, it's trading at 30x FY22's estimated earnings.
Wesfarmers Ltd (ASX: WES)
I think Wesfarmers could be one of the best examples of an ASX 200 blue chip share available to Aussies.
It was set up in 1914, so it clearly has excellent longevity. The business is now largely a retail conglomerate with subsidiaries that are leaders in their respective fields. Bunnings, Officeworks and Kmart have proven to be very good businesses. The acquisition of online retailer Catch seems like a really smart move in hindsight.
I like that Wesfarmers is willing to acquire businesses in new industries to improve its earnings profile and add more diversification to the business. The Kidman Resources deal was a good example of this – lithium clearly has a compelling future, but it was quite brave to move into a new industry.
The ASX 200 share is also willing to divest businesses if it no longer makes sense to own them such as the decision to sell the Curragh coal mine.
At the current Wesfarmers share price, it's trading at 25x FY22's estimated earnings with a grossed-up dividend yield of 4.75%.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
Soul Patts is one of the oldest businesses on the ASX. It has been listed since 1903. If that isn't good staying power I don't know what is.
The ASX 200 share started off as a pharmacy business – which is where the name of the chain of Soul Pattinson chemists comes from – but it has since turned into a multi-billion investment conglomerate. Australian Pharmaceutical Industries Ltd (ASX: API) is now the operator of the Soul Pattinson chemists. And Soul Patts is a major shareholder of API.
Soul Patts also owns shares of other businesses like TPG Telecom Ltd (ASX: TPG), Brickworks Limited (ASX: BKW), Clover Corporation Limited (ASX: CLV) and Bki Investment Co Ltd (ASX: BKI).
The great thing about Soul Patts is that, like Wesfarmers, it can change its investments over time to future-proof itself. This ability to change its portfolio makes Soul Patts a 'forever' share in my opinion, rather than just a long-term idea.
It's currently working on investing in a new industry – regional data centres. This could prove to be a timely investment with the ongoing COVID-19 pandemic causing a shift to working from home for plenty of workers.
At the current share price, Soul Patts offers a grossed-up dividend yield of 4.3%.
Foolish takeaway
I really like all three of these ASX 200 blue chip shares. A2 Milk may be able to generate the biggest returns over the next five years as its global expansion continues. But I think I like the idea of owning Soul Patts shares the most due to its defensive portfolio and ultra-long-term investment outlook.
