Long-term blue-chip stocks are the way to go to grow your wealth without taking on too much risk. Relying on the safety and compounding of blue-chip stocks will minimize drawdowns and set you on a path to wealth creation.
The three long-term blue-chip stocks discussed below are some of the most durable and high-quality businesses you can find. They possess superior competitive advantages, as defined by Michael J. Mauboussin in this Morgan Stanley research paper. As a result, they have wide economic moats protected by their irreplaceable asset base, market power and network effects.
Today, these companies exhibit impressive free cash flow margins. This means that for each dollar of revenue, they convert a substantial portion into cash earnings. Consequently, they use this cash for shareholder returns, deploying substantial amounts on dividends and buybacks. These long-term blue-chip stocks are well-positioned for sustainable growth going forward and are a stress-free way to grow your wealth.
Canadian Pacific Kansas City (CP)
This leading Class I railroad operator is one of the long-term blue-chip stocks to buy. Rail operators have some of the best economic moats. First, rail transport remains the cheapest means of bulk transport. Secondly, it’s difficult to replicate the miles of railway line infrastructure a company like Canadian Pacific Kansas City (NYSE:CP) owns due to the strict environmental and regulatory hurdles that exist today.
Canadian Pacific Kansas City, formed by the combination of Kansas City Southern and Canadian Pacific, has a unique advantage over other North American rails. It’s the only contiguous rail network running from Canada through the U.S. to Mexico. Besides, it has the leading market share in transporting goods to and from Mexico.
Today, the railway line is benefiting from the nearshoring trend. As companies build supply chain resiliency, they are shifting some of their production facilities from China to Mexico. Since the combination, the rail has had significant contract wins.
At the 2024 investor day, management guided for core adjusted combined diluted EPS of $3.84 this year. Therefore, CP stock is trading at 20 times forward earnings. What’s more, they expect annual double-digit growth between 2024 and 2028. Canadian Pacific Kansas City is the only single-line railroad linking Canada, the U.S. and Mexico; this unique advantage portends long-term growth.
Visa (V)
Visa (NYSE:V) is a payment rails provider. Although Visa is often associated with credit cards, it doesn’t do the lending. Instead, the card issuers – financial institutions like banks – do the lending. Meanwhile, Visa earns a commission on all transactions on its network. In other words, Visa and peer Mastercard (NYSE:MA) are the primary toll roads of the financial payment system.
Due to this duopoly position, Visa is one of the top long-term blue-chip stocks to buy. Indeed, it is one of the highest-quality businesses you can own. Operating margins over each of the last ten fiscal years have exceeded 64%. Furthermore, free cash flow generation is stellar, with margins averaging 58% in the last four years.
In short, Visa is a cash machine. As a result, the firm returns a significant amount of cash to shareholders. In fiscal year 2023, it returned shareholders $16.1 billion in dividends and share repurchases. What’s more, the company has repurchased 18% of shares outstanding over the last ten years.
Considering Visa has achieved a 16% compounded annual growth rate in revenues over the last three years, it’s a buy. Due to the secular shift to digital payments, it can maintain this growth rate.
Broadcom (AVGO)
If you want to play AI through a blue-chip stock, Broadcom (NASDAQ:AVGO) is a perfect way to do so. Besides, this semiconductor and software giant has proven to be a well-diversified company with consistent profitability.
There are several reasons why it’s one of the best long-term blue-chip stocks to buy. First, it has the second-largest AI exposure behind Nvidia (NASDAQ:NVDA). Morgan Stanley expects its strength in AI to drive revenue momentum. Its accelerator and networking sales related to AI will account for 40% of fiscal year 2025 revenues.
Secondly, Broadcom has built a high-margin software business through a series of value accretive acquisitions. It acquired CA Technologies for $18.9 billion in 2018 and Symantec’s enterprise business for $10.7 billion in 2019. And it recently closed the VMware acquisition, its largest purchase ever.
With VMware, Broadcom is implementing measures to drive value and accelerate growth. It has sold off non-core businesses, cut costs, augmented the go-to-market strategy and transitioned to subscription licensing. As a result, margins have improved materially, with the company guiding for 61% EBITDA margins in FY2024.
In FY2023, Broadcom generated $18 billion in free cash flow, and it could generate $23 billion in FY2024. As free cash flow surges, so does the dividend. It has posted 13 years of dividend growth and is well-positioned for more shareholder returns.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.