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

Compare the pair: Expensive versus cheap

16 ASX stocks to buy and hold forever, updated

ASX large cap outlook for 2025

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Investing

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Property

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Shares

ASX reporting season: Room for optimism

Despite mixed ASX results, the market has shown surprising resilience. With rate cuts ahead and economic conditions improving, investors should look beyond short-term noise and position for a potential cyclical upswing.

Property

A Bunnings play without the hefty price tag

BWT Trust has moved to bring management in house. Meanwhile, many of the properties it leases to Bunnings have been repriced to materially higher rents. This has removed two of the key 'snags' holding back the stock.

Investment strategies

Replacing bank hybrids with something similar

With APRA phasing out bank hybrids from 2027, investors must reassess these complex instruments. A synthetic hybrid strategy may offer similar returns but with greater control and clearer understanding of risks.

Shares

Nvidia's CEO is selling. Here's why Aussie investors should care

The magnitude of founder Jensen Huang’s selldown may seem small, but the signal is hard to ignore. When the person with the clearest insight into the company’s future starts cashing out, it’s worth asking why.

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.