3 Reasons Blue Chip Companies May Not Be Sure Bets
Blue-chip companies have a reputation for being safe and stable. This reputation has been built up over the years as such companies likely started out small, but grew much larger over the years as a result of rapid business expansion. Many investors flock to blue chip companies as they are considered safe investments that offer a consistent return.
However, the reality is that blue chip companies have also faltered and failed over the years, and the graveyard of fallen companies is littered with once-famous blue chip companies that fell from grace and were unable to pick themselves back up. Investors should rid themselves of the illusion that blue chip companies are “sure bets,” as such companies are also subject to business, economic, and competitive forces.
Here are three reasons blue chip companies may not always be a sure thing.
1. Industry structural change
Industries can go through different types of changes over the years, as new technologies and inventions alter the industry’s landscape. Some changes may be temporary and resolve themselves over time, while others may be permanent. Permanent changes are known as structural changes as they change the dynamics of how the industry operates, thus affecting all players.
Take for example SIA Engineering Company Ltd (SGX: S59), which saw its maintenance, repairs, and overhaul (MRO) business come under pressure due to two structural trends: the emergence of more competitors in Asia vying for a slice of the business, and more efficient airplane engines that required much less maintenance. As a result, operating profit has come under pressure, and SIA also cut its annual dividend.
2. Outdated business model
Even a blue chip company may end up with an outdated business model if it doesn’t invest resources and effort to keep up with the times. Adaptation and evolution are part and parcel of successful businesses, but some companies have an easier time than others adapting to new trends and technologies.
Singapore Post Limited (SGX: S08) is one such example. The group’s post and parcel division has been witnessing lower volumes over the years as increasing numbers of people use email rather than snail mail. Though the division has been buffered by higher cross-border e-commerce-related delivery volumes, its operating margin continues to remain under pressure. Efforts to diversify into US e-commerce companies a few years ago have failed to alleviate the situation.
3. Regulatory risks
Regulatory risks can also take their toll on a company operating within a highly regulated sector. Even if a company has a great track record and reputation, such risks can crimp its ability to keep costs low, and they may also affect its operations in negative ways.
Singapore Airlines Ltd (SGX: C6L), or SIA, being an airline company, operates in a highly-regulated industry with many rules and regulations. Though the group has a stellar reputation for being one of the best airlines in the world, the level of scrutiny imposed on its operations often causes the airline to report volatile financial numbers.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.