It’s an old stock market adage that FTSE 100 blue-chips are less risky than small-cap stocks. However, there are exceptions to the rule. Indeed, I’m convinced a few small-caps actually have stronger blue-chip credentials than some Footsie giants!
Regular Motley Fool readers will know I’ve been banging on for years in praise of the couple of dozen long-established family businesses listed on the UK stock market. Pubs group Fuller, Smith & Turner (LSE: FSTA), soft drinks firm Nichols (LSE: NICL), and lighting company FW Thorpe (LSE: TFW) are three such firms. Let me show you their blue-chip credentials, and why I’d be more than happy to buy them today.
Building long-term wealth
Strong balance sheets, and careful stewardship through multiple economic cycles and market crashes, are features of these businesses. I believe these qualities align well with the aims of investors seeking to steadily build wealth over the long term.
Furthermore, with a largely stable shareholder base of family members, and like-minded long-term investors, these companies’ share prices tend to hold up relatively well through the sort of market crash we’re currently experiencing.
The table below shows the performances of the FTSE 100, Fullers, Nichols, and Thorpe since markets went into free-fall after 21 February.
|
 |
Price at 21 Feb |
Price at 11 March |
Change |
|
FTSE 100 |
7,404 |
5,237 |
-29% |
|
Fullers |
914p |
682p |
-25% |
|
Nichols |
1,425p |
1,350p |
-5% |
|
Thorpe |
319p |
274p |
-14% |
Seven decades of dividend growth
Fullers (founded 1845) owns premium pubs and hotels, as well as craft cider and gourmet pizza restaurant chain The Stable. As you can see, it’s outperformed the FTSE 100. This is despite it being in one of the sectors most heavily impacted by Covid-19 fears. For example, blue-chip Whitbread, the owner of Premier Inn — and food and drink chains, including Brewers Fayre — has seen its shares plummet 46%.
Fullers has a strong, freehold property-backed balance sheet. Furthermore, the sale of its brewing business last year, with cash proceeds of over £200m, now looks very timely. The company has a remarkable dividend record of seven decades of unbroken growth. The running yield of 3% and price-to-earnings (P/E) ratio of 14 indicate value against historical standards. And the same is true for Nichols and Thorpe.
Defensive out-performer
Nichols (founded 1908) owns a portfolio of still and carbonated drinks brands, headed by its flagship brand Vimto. The superior performance of its shares (-5%) versus the FTSE 100 reflects the defensive characteristics of the business. Having said that, it’s also outperformed Footsie drinks giant Diageo (-23%), which is widely seen as an exemplar of blue-chip quality.
Nichols’ latest annual results show cash of £40.9m on the balance sheet at the year-end, and no debt. The cash-adjusted P/E is 17 and the running dividend yield is 3%.
Another cash-rich small-cap stock
FW Thorpe (founded 1936) designs, manufactures and supplies professional lighting systems. It serves diverse industries and customers. Nevertheless, it’s more geared to the general economic backdrop than a company like Nichols. In other words, it’s a cyclical rather than defensive business. Yet its shares (-14%) have significantly outperformed not only the FTSE 100 during this market crash, but also classy blue-chip sector peer Halma (-19%).
Thorpe is another cash-rich family business. It had £30.8m on its balance sheet and no debt at its last year-end. The cash-adjusted P/E is 17.8 and the running dividend yield is 2%.
Hopefully, you can now see why I believe Fullers, Nichols and Thorpe deserve to be called blue-chip small-caps.