Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 210

Unconstrained growth found in fresh places

Many investors appreciate the extreme concentration in the Australian stock market. Only 20 stocks account for about 60% of the total value of the market, and within those largest 20 stocks, there is a heavy weight to just a few sectors, especially banks and resources.

More subtly, there is also a heavy weighting in a relatively homogenous group of stocks with similar investment attributes.

Big caps dominate

Consider the following 12 stocks in the ASX 20 Index:

  • The four big banks (CBA, Westpac, NAB and ANZ)
  • Telstra
  • Wesfarmers
  • Woolworths
  • Transurban
  • Scentre
  • Suncorp
  • IAG
  • AMP

All are commonly considered ‘blue chips’ and are well owned by Australian super funds and other investors. They account for approximately 27% of the total value of the All Ordinaries Index.

They all have solid core businesses with large market shares in relatively consolidated, mature and domestically-constrained industries. They generate strong and consistent cash flows but have limited opportunities to reinvest those cash flows back and so are left simply to distribute them to shareholders.

Strong dividend yields but little else

Reflecting as much, their investment proposition is generally dependable and attractive dividend yields but little earnings growth.

Despite this, these stocks should not be dismissed. At the right price, their typically fully franked yields are appealing. And, at times, they can offer some interesting growth prospects. For example, the big four banks should grow to the extent that the credit cycle allows. Alas, that is currently very little. Indeed, almost all of them rely on economic or industry conditions for their growth and struggle to achieve any if conditions are not supportive.

But it is not just economic conditions that can constrain earnings growth for these blue chips. Many are also facing a rise in competition. For example, the banks’ more profitable niches are facing competition from financial technology, or 'fintech'; Telstra faces new entrants and new telecommunications networks (TPG Telecom in mobile and NBN resellers in broadband); and Scentre faces online competition pulling retail spend from its shopping centres.

There is perhaps some circularity. When the pie is not growing, growth can only come from taking it from a competitor. Taking market share entails competitive attack and response, most commonly through lower prices that reduce revenues or margins, both of which act to reduce the industry’s profit pool.

For example, last decade the supermarket industry enjoyed benign competition, dominated by Woolworths, and this supported decent earnings growth. Since then, competition has intensified, with a rejuvenated Coles and the expansion of Aldi and Costco. All players have come to ‘invest’ in lower prices and a better service offering, and their investment has pressured the top and bottom-line growth for the industry. With lower barriers to entry, and the possibility of new entrants such as Amazon, the constraint on growth arising from the competition is unlikely to abate.

Diversification has become one investment type

The upshot is that some investors who thought they were diversifying by buying a selection of blue chips have actually concentrated their portfolios into a particular investment style, one characterised as low-growth yield plays.

For genuine diversification, investors should look to companies offering the opposite, such as:

  • offshore markets in which to expand
  • fragmented industry structures
  • differentiated customer offerings enabling market share gains
  • structurally growing markets and
  • opportunities to reinvest cash flows back into the business for growth.

We typically look for companies with ‘exportable competitive advantages’, being those with innovation, brands or products that travel well offshore.

Examples include:

Innovation

  • Proving that big isn’t always boring the high-growth CSL is a blue chip that is actually the sixth largest stock on the ASX. The company is a low-cost manufacturer of plasma-derived medicines, for which global patient demand is in strong growth. CSL is investing over US$600 million annually in R&D to develop new and improved biomedicines, which allows it to gain a revenue advantage over competitors in respect of each litre of plasma collected. The company continues to leverage this competitive advantage to profitably take market share and expand internationally, including most recently into the large Chinese market.

  • Aristocrat, best known as a slot manufacturer, is spending over $250 million annually on the design and development of new and improved games. Successes like ‘Lightening Link’ allow the company to take market share in the 90 countries it sells into, with the most important being the large US market. The company also leverages its gaming innovation into its nascent online ‘social’ casino-style games business, for which it now has over 1.4 million daily users around the world and counting.

Brands

  • BWX owns the Sukin brand, an Australian brand of natural skincare creams that has essentially found its own spot in the ‘masstige’ market. BWX has a strong presence in Australia, but more importantly for its long-term growth prospects, the company is expanding into various offshore markets. It is exporting Sukin products into the UK, where it has just recently started selling through Boots, the UK’s largest pharmacy chain, as well as into Canada, China and elsewhere.

  • Treasury Wine Estates owns luxury and ‘masstige’ wine labels such as Penfolds and Wynns that are increasingly in demand in offshore markets, including most importantly in the high growth and highly profitable Chinese market.

Products

  • Reliance Worldwide manufactures plumbing products, including the innovative Sharkbite branded push-to-connect plumbing fittings. These fittings are growing in popularity among plumbers worldwide, allowing Reliance to steadily take market share, most importantly in its largest market the US, and to enter and expand into other international markets, with the most promising being in Europe.

  • ARB is a manufacturer of four-wheel drive accessories such as bull bars and canopies. It has a strong brand; it tailors its products to specific vehicle makes and develops innovative new products that it exports to 100 countries worldwide. The exporting of these products enable ARB to steadily grow its businesses in offshore markets.

 

Julian Beaumont is investment director at BAEP, a boutique partner with Bennelong Funds Management. This article is general information that does not consider the circumstances of any individual.

 


 

Leave a Comment:

RELATED ARTICLES

Will ASX dividends rise over the next 12 months?

Compare the pair: Expensive versus cheap

16 ASX stocks to buy and hold forever, updated

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.