In this article, we will take a look at 10 best blue chip stocks with strong balance sheets. If you want to see more of the best blue chip stocks with strong balance sheets, go directly to 5 Best Blue Chip Stocks With Strong Balance Sheets.
Companies with strong balance sheets have more flexibility in challenging times.
With more cash on their balance sheets and not as much debt relative to their earnings power, fiscally strong companies can buy back more stock at lower valuations.
With M&A, fiscally strong companies can expand by buying companies with weaker balance sheets. Many fiscally strong companies can also gain market share by spending more on R&D or marketing during tough times.
A company with a strong balance sheet generally has substantial net cash on its balance sheet. If it does have net debt, a fiscally strong company will have substantial earnings and cash flow to be able to cover its net debt.
Fiscally strong companies sometimes have a net debt position because the cost of debt was very affordable when interest rates were low and those companies decided they could add more value if they returned more capital back to shareholders rather than keep it on their balance sheets.
2022
Given the high inflation, the Federal Reserve has raised interest rates six times in 2022 alone. With the Federal Reserve expected to continue to raise interest rates and with a potential recession in 2023, it could get tougher before it gets better.
In the challenging times, blue chip companies with strong balance sheets can offer potential long term value for shareholders given lower valuations and potential value adding expansion opportunities.
In the near to medium terms, however, there could be more downside to the market and individual stocks if economic data fails to meet expectations.
Given the uncertainty, it could be a good idea for long term investors to own a well diversified portfolio of stocks across many different sectors.
Methodology
For our list of 10 Best Blue Chip Stocks With Strong Balance Sheets, we chose 10 leading stocks with strong balance sheets and strong competitive advantages.
Using the collective wisdom of hedge funds, we ranked the 10 stocks based on the number of hedge funds in our database that held shares of the same stock at the end of Q2 2022.
10 Best Blue Chip Stocks With Strong Balance Sheets
10. BlackRock, Inc. (NYSE:BLK)
Number of Hedge Fund Holders: 50
BlackRock, Inc. (NYSE:BLK) has substantial earnings capacity, a strong liquidity profile and also moderate financial leverage. As of October 2022, Moody’s calculates that BlackRock, Inc. (NYSE:BLK) has a leverage of 1.1x adjusted EBITDA and assigned the company a long term ‘Aa3’ rating. According to the ratings agency, “obligations rated Aa are judged to be of high quality and are subject to very low credit risk.”
Alongside Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT), BlackRock, Inc. (NYSE:BLK) is a blue chip stock with a strong balance sheet that many hedge funds in our database owned at the end of Q2 2022.
9. Goldman Sachs Group, Inc. (NYSE:GS)
Number of Hedge Fund Holders: 69
Goldman Sachs Group, Inc. (NYSE:GS) is Wall Street’s premier investment bank. As such, the company has substantial resources and a very strong balance sheet. According to the company’s latest earnings report, Goldman Sachs Group, Inc. (NYSE:GS) had an advanced CET1 capital ratio of 14.6% in Q3 2022 up from 13.9% from Q3 2021. Given its excess cash generation, Goldman Sachs Group, Inc. (NYSE:GS) also returned $1.89 billion of capital back to shareholders during the quarter including $1 billion in share buybacks.
8. Pfizer Inc. (NYSE:PFE)
Number of Hedge Fund Holders: 70
Pfizer Inc. (NYSE:PFE) is one of the largest pharmaceutical companies in the world. Given the pandemic, Pfizer Inc. (NYSE:PFE) has had considerable COVID-19 vaccine and product sales that have increased the company’s revenues and financial strength. For Q3 2022, Pfizer Inc. (NYSE:PFE)’s antiviral Paxlovid generated $7.5 billion in sales alone, accounting for 33.2% of the company’s total revenue for the quarter. Given its strong financial resources, Pfizer Inc. (NYSE:PFE) paid $6.7 billion in cash dividends and repurchased $2 billion in shares during the first nine months of 2022. Of the 895 hedge funds in our database at the end of Q3 2022, 70 were long Pfizer Inc. (NYSE:PFE), ranking it #8 on our list of 10 Best Blue Chip Stocks With Strong Balance Sheets.
7. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 83
Johnson & Johnson (NYSE:JNJ) has a very strong balance sheet given its cash on hand of more than $30 billion and its free cash flow after dividends of around $9 billion a year. As a result of Johnson & Johnson (NYSE:JNJ)’s balance sheet and its competitive strengths, the company has a long term credit rating of ‘Aaa’ from Moody’s. According to the ratings agency, “Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.”
ClearBridge Investments commented on Johnson & Johnson (NYSE:JNJ) in a Q2 2022 investor letter,
We reinforced our defensive capabilities during the quarter with the addition of Johnson & Johnson (NYSE:JNJ), a diversified health care company with a strong balance sheet, attractive profitability and return metrics and the ability to generate steady moderate growth. It has one of the more diversified and attractive pharmaceutical portfolios and an improving medical technology business, and it will soon be exiting the lower-growth consumer business. We believe new management has sharpened the strategy to improve execution in the medical device business and look for more meaningful capital allocation opportunities, which the balance sheet can easily support. Johnson & Johnson’s products and services have a clear positive impact on human health. The company’s long-held credo sets the tone for ethical business practices and considering all stakeholders in guiding its decision making and prioritizing patients and caregivers. The company also contributes to 11 Sustainable Development Goals (SDGS) through its Health for Humanity 2025 goals.
6. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 104
Given its scale and leading businesses, JPMorgan Chase & Co. (NYSE:JPM) has a strong balance sheet. For its Q3 2022, JPMorgan Chase & Co. (NYSE:JPM) had a standardized CET1 capital ratio of 12.5% and an advanced CET1 capital ratio of 13%. The company also paid a common dividend of $3 billion given its excess cash generation.
Vltava Fund commented on JPMorgan Chase & Co. (NYSE:JPM) in a Q3 2022 investor letter,
We regard JPM to be the strongest and best- managed bank in the world. It is a leader in investment banking, commercial banking, credit cards, and asset management. Its size (the largest bank in the USA, with nearly USD 4,000 billion in assets) and diversification give it a strong competitive advantage that is compounded by its cost advantages and the high costs to clients associated with switching banks. JPM’s management prides itself on running the only large bank to avoid major instability over the long term.
JP Morgan’s quality and strength first became fully evident in 2008 under the leadership of its CEO Jamie Dimon. Not only did JP Morgan help to stabilize the market by taking over the failing Bear Stearns in the spring of that year, but throughout the Great Financial Crisis it was the only big US bank that did not require government assistance and it was highly profitable even in the difficult year of 2008.
A well-functioning and efficient bank can be a very good long-term investment, because the interest compounding effect works well here. JPM’s return on equity (ROE) is well into the double digits and this puts it in a good position to continue producing better long-term returns than does the market. JPM has been very profitable even during years when interest rates were close to zero. The current – and perhaps not temporary – return to somewhat more normal, higher interest rates should have a significantly positive impact on the bank’s interest income and overall profitability.”
Like JPMorgan Chase & Co. (NYSE:JPM), Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT) are blue chip stocks with strong balance sheets that many hedge funds in our database owned at the end of the second quarter.
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Disclosure: None. 10 Best Blue Chip Stocks With Strong Balance Sheets is originally published on Insider Monkey.