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How worthy is your decision to Invest in Blue-chip Companies? Study shows blue-chip return exceed NEPSE return and inflation

- ShareSansar, October 10, 2017  on Exclusive , Featured , Financial Analysis , Latest , Stock Market
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  • Ujjwal Bohara (ujjwal.bohara93@gmail.com)

Every time we think about blue-chip stocks the name that clicks our mind are Nabil Bank, Everest Bank, Standard chartered, Nepal Investment Bank and the like. It’s not only because of their huge market capitalization or stable growth but also the consistent and handsome return it provides attracts us.

What is Blue-chip?

As per Investopedia, A blue chip is a nationally recognized, well-established, and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.

So we can summarize Blue-chip with the following characters

  • They are usually large companies.
  • They are usually older companies.
  • They generally sell widely used products or services.
  • They perform relatively well during economic downturns.
  • They have records of long-term, stable growth.
  • They usually pay regular dividends, and those dividends usually grow over time.
  • They have reputations as management and industry leaders.
  • They are usually very creditworthy.

One of the feature that lures the investor is definitely the consistent, handsome and growing dividend. As it is the prime reason behind investment in stocks. Let us now do a comparative analysis of 3 Blue-chip companies on the basis of return they provided. The companies for the analysis are namely:

  • Everest Bank
  • Nepal Investment Bank
  • Nabil Bank

Suppose there is an investor Mr. A. who had decided to invest on 3 Blue-chip companies, 6 years before on his birthday. He invested Rs. one lakh each on three companies on 18th Jestha 2069. He then kept those shares aside and never thought of selling them during the period. So, the worth of those investments now can we seen in the table below.

Everest Bank
Stocks purchased : 100 units @ Rs. 1000
YearDividendTotal UnitsAfter tax Cash Dividend
2068/6930%130
2069/7010%143Rs. 6500
2070/7112%160Rs. 7064
2071/7230%208Rs. 800
2072/7370%354

As per share cost of Everest Bank at that time was Rs 1000, Mr. A bought 100 units of this company.

One hundred units purchased 6 years before ended up being 354 units by last year. The cash dividend received amounts to Rs 14,364. Had he re-invested the cash dividend at 7% normal interest rate, it would worth Rs 16,907.

Not only this, the bank later called for 33% right from its existing shareholders resulting an increase in Mr. A’s share quantity. Currently he has 471 units of Everest bank which has a worth of Rs 5.65 Lakhs. Making his total investment worth Rs. 5.82 lakh currently.

Nepal Investment Bank
Stocks purchased : 200 units @ Rs.500
YearDividendTotal UnitsAfter tax Cash Divd.
2068/6925%250750
2069/7010%2756,125
2070/7115%316.256,669
2071/7233%420.61
2072/7320%504.738,412
2073/7415%580.4412,240

Mr A bought 200 units of Nepal Investment Bank by allocating Rs 1 lakh on it. The per share price of Investment bank at that time was Rs 500.

Two hundred units purchased 6 years before ended up being 580 units by this year. Had he re-invested the cash dividend at 7% interest rate, it would worth Rs 38,492. Valuing his total investment at 4.01 lakh as of today

Not only this, the company that he holds has now become stronger fundamentally as well as in its customer base. The company has timely conducted its AGM keeping its shareholders at the top. It is now on a path of gradually increasing its capital after successfully meeting the central bank’s directed capital requirement.

Nabil Bank
Stocks purchased : 80 units @ Rs.1250
YearDividendTotal UnitsAfter tax Cash Divd.
2068/6920%962,800
2069/7025%1203,360
2070/7120%1444,800
2071/7230%1875,760
2072/7330%2431,870
2073/7430%3163,159

Eighty units purchased 6 years before ended up being 316 units by this year. Had he re-invested the cash dividend at 7% interest rate, it would worth Rs 22,808. With the current market value being Rs 1200 his total shares worth Rs 3,79,200 and investment at Rs 4,02,008.

The company has provided Mr. A with sufficient cash dividend on a regular basis. The company not only increased the quantity of shares but also provided him with sufficient liquidity.The constant declaration of dividend by the company saved it from pressure of meeting the capital requirement of 8 arba. Apart from this, The Company never gave him any trouble by filling right share. The constant growth and consistent return helped both the shareholders as well as the company.

Rate of Return

CompanyTotal InvestmentMarket Value

Of Investment

Years% of Return (CAGR)
Everest Bank1.11 lakh5.82 lakh4*51.32
Nepal Investment1 lakh4.01 lakh532.01
Nabil Bank1lakh4.02 lakh532.08

*(CAGR: Compound Annual Growth Rate)

*(4 years is taken as investment in Everest bank because it has not yet declared the dividend for 2073/74)

All three companies return has exceeded the average NEPSE return and also the return is far above than inflation rate. 10 year NEPSE return is 15% approximately.

CONCLUSION

On analyzing carefully one can easily find that price of these stocks currently is just near to the price when Mr. A purchased it. This indicates that the price of banks are almost at their reasonable level in the current period.  For any investor seeking to start an investment can enter at this point setting a 5 year target. And review the portfolio after a specific period.  Just like Mr. A one can end up getting an above average return if best stocks are selected.

This study has also proven that the above stocks are indeed a blue-chip for an investor in terms of the return it provided.  Just like what Benjamin Graham has written in his best-selling book   “The intelligent Investor”, Conservative investors should look for stocks that have consistently paid a dividend for large number of years. One can invest in such companies that provides consistent, growing and above average return to its investors.

So it will be wise for rational investors to invest on blue chips companies and hold for long term. History has shown us that blue chips companies return is more than average NEPSE return and average inflation rate.

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