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Should you buy these beaten down blue chip shares?

James Mickleboro
fall, take hit, punch, boxing

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) may have just climbed to a 10-year high but not all shares on the index have been so lucky.

Two blue chip shares have come under significant pressure this year and have traded at multi-year lows this week. Is it time to invest in these beaten down blue chips?

The Ramsay Health Care Limited (ASX: RHC) share price fell to a multi-year low of $54.35 on Thursday following its disappointing trading update. I can’t say I’m surprised to see the private hospital operator downgrade its profit guidance. In my opinion the writing has been on the wall for some time, especially given falling private hospital coverage numbers and a weak trading update from industry rival Healthscope Ltd (ASX: HSO) earlier this year.

Despite yesterday’s sizeable decline, Ramsay’s shares are changing hands above 20x estimated full-year earnings. I don’t think this is particularly cheap for a company expecting earnings growth of 7% in FY 2018, no matter how high quality its operations are. And with management expecting an equally weak FY 2019, I’m not convinced its shares have bottomed yet and fear they could ultimately drift below the $50 mark. At that level I might be interested in picking up shares, but only if there are signs that the tough trading conditions will ease in FY 2020.

The Telstra Corporation Ltd (ASX: TLS) share price fell to a multi-year low of $2.71 this week following its investor day event. The market has not reacted positively to its 2022 strategy and appears convinced that its dividend is going to be cut. As a share that is predominantly bought for income, I feel this is likely to weigh on its share price performance for some time to come.

Especially with Citi predicting that Telstra will be paying a dividend of no more than 10 cents per share by FY 2021. Traditionally Telstra’s shares trade with a yield of at least 6%. If it were to do the same with a 10 cents per share dividend, its share price would have to be down as low as $1.66. This would mean a decline of almost 39% from its last close price. In light of this, I would suggest investors stay clear of Telstra until there is more clarity on its future dividends.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.