After share price falls of Provident, Carillion, WPP and Dixons – is there a case for holding blue chips anymore?

Katherine Denham
Source: Getty

It's been a difficult summer for some large cap companies in the UK.

Back in July, FTSE 250 firm Carillion saw its share price nosedive on the back of a profit warning, before tumbling to fresh lows towards the end of last month.

While arguably not a blue chip, the construction company is an established name, having been awarded contracts for several high profile projects, including HS2 railway line, and the revamp of Battersea Power Station.

Then on 22 August, Provident Financial’s share price plummeted by more than 70 per cent, which served as a blow to some high profile investors, including star fund manager Neil Woodford who has a 20 per cent stake in the firm. This fall was closely followed by a fall from media group WPP, after it cut its growth forecasts.

And a day later, Dixons Carphone saw its market value shrink by nearly a third in a matter of minutes, prompting its chair Ian Livingston to apologise for the company’s poor performance.

Read more: Dixons boss: We're sorry... but markets didn't like us before the bad news

In the past, these stocks might have been seen as sturdy investments – the kind of investment where you simply put your cash in and watch it grow, confident that it would be able to weather the storm.

But times are changing, and the question now is whether these plunging prices signal the end of reliable, blue chip companies.

One argument is that the market is becoming more speculative, with investors increasingly basing their buy and sell decisions on conjecture, as opposed to facts.

The availability of information online is partly responsible for the rise of a herd mentality, as investors rush between stocks to chase the gains, while even minor alterations to analyst predictions cause massive fluctuations in share prices.

Summer is also a time when many stock pickers go away on holiday. As the old adage goes: “sell in May and go away”, meaning less money is flowing into stocks during the summer months, leaving markets relatively thin, and therefore vulnerable to sharp movements.

And of course there’s the undeniable impact of technology. The companies that have prepared have proved resilient, but others are only just beginning to see the full effect of this disruptive force.

Share Centre analyst Graham Spooner says: “historians of the future could very well focus on this period as a changing of the guard. But this could be in relation to the impact and ever increasing pressures that changing technology has had on established names.”

For example, he points to the major overhaul of Provident’s operations, as it moves to a computer-driven business model. And the argument applies even more to Dixons, one of many retailers to be affected by online competition.

But Dixons’ recent share price fall also came about because people have been holding onto their mobile phone handsets for longer, which was blamed on a lack of innovation in the market.

Yet Spooner disputes whether the falls across these companies indicate a wider trend for blue chips in general. “I think there is a misleading view that blue chip firms are indestructible. Yes, volatility can increase over the summer period, but I don’t think recent falls can be singled down to one particular thing.”

Russ Mould, investment director from AJ Bell, says blue chips can still be good buy and hold stocks – but only over a limited timeframe. For example, of the original FTSE 100 list of 1984, there are only around 30 still in the index, while barely a quarter of the current crop have managed to increase their dividend every year for the past decade.

Mould says investors are easily frightened at the moment. “Beneath the very calm-looking headline indices, there is still a huge amount of churn and rotation going on, between stocks and sectors.

“Investors still don’t know whether we’re going to get an inflationary upturn, deflationary downturn or stagflationary mess somewhere in the middle, and that is a major challenge for them, as each scenario requires a different asset allocation strategy.”

It’s this combination of factors that create a melting pot of issues for companies.

But that’s not to say there are no companies worth holding onto. “Dividends and their reinvestment are the secret sauce of investing – they provide the bulk of total investment returns over time,” Mould explains.

“But the real benefits of compounding and dividend reinvestment only really take hold after a decade or more, so this reaffirms how investing in stocks is a long term business.”

The share price swings this summer have been caused by factors underlying the individual companies, rather than signifying a shift away from reliable stocks.

Of course when the bull markets start to tire, cracks appear in the weakest links first, Mould says. This means that those firms with sparse dividend cover or hefty amounts of debt will start to feel the pain as the investment cycle finally rolls over.

There’s also arguably a readjustment happening, which could see a new generation of blue chips emerge.

When looking for a blue chip, the trick is to establish whether the firm has pricing power by focusing on its market share, brands, and technological edge, before looking at a company’s financial strength, management acumen, and valuation.

If all this stacks up, then you may have found a good investment to hold onto for the long term.

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