There are some high-quality ASX blue chip shares that I’d want to own in my portfolio.
I wouldn’t want any of the big ASX banks, as I don’t think they have much growth potential.
I’d like to consider businesses that are among the best on the ASX at what they do. But I’m also looking for ideas that have diversification prospects, like these two:
Wesfarmers Ltd (ASX: WES)
Wesfarmers is one of the biggest businesses on the ASX. It’s also one of the oldest, so it already ticks some of the boxes when it comes to being a reliable blue chip.
It owns a few category-leading businesses. Bunnings is the gem of the company, it generates a large amount of profit for the equity in the business. Bunnings saw off the challenge of Masters and now it’s in a very strong position.
Then there’s Officeworks, which is the biggest office supplies business.
Kmart is the leading discount department store. Target and Catch are also two of the main contenders in the retail world.
Not only can Wesfarmers grow its existing business organically, but it is also willing to make useful acquisitions.
For example, it acquired a lithium project. Lithium has good prospects with the rising number of electric cars and batteries in the home.
I like that Wesfarmers is long-term focused and that management are adjusting the business to the future. It sold the coal businesses, bought a lithium asset and acquired a leading online retailer.
At the current Wesfarmers share price, it is valued at 26 times the estimated earnings for the 2022 financial year.
Fortescue Metals Group Limited (ASX: FMG)
A commodity business is not typically what I’m attracted to. And today’s Fortescue share price is not what I’d be willing to buy at.
However, the iron ore price continues to perform better than what many investors were expecting. A better iron ore price will support a bigger dividend in the short-term.
Iron ore won’t always be this strong. But when it falls it won’t always be weak either. The next bust for iron ore could be a good time to buy Fortescue shares.
What attracts me to Fortescue about the long-term is the prospect of future diversification.
The ASX blue chip share is exploring sites that may find sizeable deposits of materials that aren’t iron. Commodity diversification alone would make Fortescue a more consistent investment.
What particularly attracts me is Fortescue Future Industries (FFI). This is where the business is pursuing a wide range of green projects and it’s looking to make Australia a world-leader in certain sectors in new technology.
It’s testing out large battery technology for its mining fleet of vehicles. FFI is also looking into the potential to make steel at low temperatures without using coal. It’s also trialling hydrogen fuel cell power for Fortescue’s drill rigs. It’s also trialling technology on Fortescue’s locomotives to run on green ammonia.
Fortescue is funding FFI with 10% of its net profit each year. Another 10% is for exploring for other projects. The remaining 80% will be paid out as a dividend. That means big cash returns each year.
At the current Fortescue share price it has a projected fully franked dividend yield of 16.8% for FY21 according to Commsec. It won’t stay that high for ever though, particularly if Brazilian and African iron ore supply grows in the coming years.
