QUALIPORT
Five Quality Blue Chips

By Maynard Paton (TMFMayn)
December 4, 2003

The Qualiport aims to buy great companies at attractive valuations and hold for the long term. The portfolio uses a watch list to monitor potential purchases, something that has proved very useful over the past couple of years.

However, only three of the sixteen watch list shares -- Imperial Tobacco (LSE: IMT), Gallaher (LSE: GLH) and Emap (LSE: EMA) -- are members of the FTSE 100. Does this mean most 'great companies' are to be found in the lower reaches of the market? Not really. A cursory inspection suggests these five blue chips could match the Qualiport's investment criteria.

1. BT (LSE: BT.A)(NYSE: BTY)

Still Britain's dominant fixed-line telecom company after witnessing numerous rivals go broke. New management have curtailed previous growth ambitions and appear to have successfully turned the firm into a cash cow. That infamous £30b debt pile is now down to £9b, capital expenditure (capex) has been reined in and even a share buyback is underway.

'Voice' revenues are waning though, but income from the fast-growing broadband division could limit the damage. Interestingly, projected cost savings of £1b by 2006/2007 could boost current profits by a third. A 176p share price gives BT a £15b market value, a prospective price to earnings (P/E) ratio of 10 and a 4.7% dividend yield. Not expensive. Read more | more.

2. GlaxoSmithKline (LSE: GSK)(NYSE: GSK)

A £80b pharma giant faced with patent expiries and a lack of blockbusters in the pipeline. Yet old treatments are continually upgraded to keep one step ahead of the generics, while £4b is spent annually on research and development. With the industry growing at around 10% per annum too, shareholders can surely expect some lucrative medications sooner or later.

Accounting highlights include operating margins of 32%, relatively little debt and an ongoing share buyback programme. GSK at 1,311p provides a forward P/E of 15 and a 3% dividend yield. In their heyday, the shares were trading on a P/E of 30. Good news from the laboratories could therefore see a substantial re-rating. Read more and even more.

3. Liberty International (LSE: LII)

Liberty who? An unfamiliar blue chip that owns high profile shopping centres such as Lakeside at Thurrock and the MetroCentre in Gateshead. Long customer leaseholds (most run for over ten years) provide operational predictability while planning restrictions offer significant barriers to entry.

Other bonuses include an illustrious 20-year dividend record and a no-nonsense, outspoken chairman. But there's lots of debt and capex can be sizeable. A 673p share price values Liberty at £2b and provides a 2003 P/E of 25 and a yield of 3.7%. The last reported net asset value was 866p a share. Read more and still more.

4. Sage (LSE: SGE)

The UK's leading accounting software business and a 1990s growth share legend. Key long-term attractions include a focus on small businesses and their need for ongoing IT support, and the inherent difficulties of switching to a rival payroll system. Margins in the UK come to a whopping 40%.

Up-front subscription payments, low capex requirements and relatively little debt are among the other bookkeeping features. Dividend payments though are covered a tight-fisted five times, which is no doubt due to the ambitious acquisition strategy. A market value of £2b and a P/E of 20 indicate there's no rush to buy the 185p shares, especially as recent results showed sales were up only 4%. Read more and a bit more.

5. Vodafone (LSE: VOD)(NYSE: VOD)

The world's largest mobile phone company, where massive infrastructure costs, technological expertise, a popular brand and government licences provide the moat. Unlike BT, shareholders can expect customer numbers to increase 10% both this year and next, and there's also the unknown growth quantity that is 3G.

Talking points within the accounts are operating margins over 30%, £104b of intangibles and a rather byzantine set of joint ventures. Also appears to be swilling with cash, with the latest dividend raised 20% and £2.5b earmarked for a share buyback. A 137p share price equates to a £93b market value, a forward P/E of 16 and a miserly yield of 1.4%. Read more and more.

Watch list update

Quickly weighing up the 'big picture' business qualities, growth prospects and valuations, GSK appears the most attractive at the moment, followed by BT, then Vodafone, Liberty and finally Sage. The 'circle of competence' and 'complex accounts' factors could come into play, but all five may very well be portfolio material. However, which watch list shares they end up replacing -- if any -- will prove a harder decision to make. The sixteen shares monitored presently are shown below:

Company                              Market     Price      Buy
                                     Value    (03/12/03)  Price
                                      (£m)       (p)       (p)

Imperial Tobacco (LSE: IMT)          7,915     1,086     1,038
Gallaher (LSE: GLH)                  3,913       601       527
Emap (LSE: EMA)                      2,189       853       657
Associated British Ports (LSE: ABP)  1,428       437       388
Johnston Press (LSE: JPR)            1,285       435       377
London Stock Exchange (LSE: LSE)     1,019       343       339
Carpetright (LSE: CPR)                 543       771       627
Halma (LSE: HLMA)                      494       135       116
Capital Radio (LSE: CAP)               418       505       400
DFS Furniture (LSE: DFS)               410       382       425
Renishaw (LSE: RSW)                    410       564       352
Rotork (LSE: ROR)                      317       370       290
Scottish Radio (LSE: SRH)              292       840       500
Games Workshop (LSE: GAW)              229       753       467
Ulster Television (LSE: UTV)           198       378       241
Metal Bulletin (LSE: MTLB)              95       176       113

The author owns shares in Carpetright, DFS Furniture, Games Workshop, GlaxoSmithKline, Halma, Johnston Press and London Stock Exchange.

More: Beat The Market With A Watch List | The Ideal Qualiport Share