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Stocks to Beat Inflation

Inflation is taking a bite out of your wallet. According to the Bureau of Labor Statistics, the latest reading was 8.5%, meaning prices are 8.5% higher than in March 2021. This value is the highest rate of inflation in 40-years. Of course, it’s not the highest percentage, but it is still making trips to the grocery store and gas station painfully more expensive.

Inflation is probably punishing some stocks in your portfolio. Your groceries are more expensive, and so are materials, labor, and freight for companies. Some companies can’t raise prices since consumers won’t pay them. Instead, they must absorb the cost, and thus they are less profitable. In turn, lower profits usually mean lower stock prices. For example, Clorox (CLX), the maker of bleach and other cleaning supplies, warned about the impact of inflation, and the stock price has been down about (-17%) year-to-date and (-24%) in the past year.

However, some companies are doing well despite inflation and have pricing power. Here are three stocks to beat inflation.

Stocks to Beat Inflation
Stocks to Beat Inflation

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3 Stocks to Beat Inflation

Occidental Petroleum

Occidental Petroleum (OXY) is a large oil and natural gas exploration and production company operating around the world. 

OXY has been in the news often in the past two years. The company bought Anadarko for $55 billion, including debt, in 2019. Next year, the COVID-19 pandemic decimated oil prices, and OXY struggled with high debt, losses, and dividend cuts.

Portfolio Insight - Earnings per Share OXY
Source: Portfolio Insight*

However, Warren Buffett helped make the Anadarko deal work. According to Warren Buffett’s annual letter in 2021, he invested $10 billion in exchange for preferred shares and warrants for common stock. The preferred shares pay a coupon of 8%. In addition, Buffett has been buying common stock and now owns about 20% of the company. It’s tough to argue against Buffett, and his moves are usually good ones to follow.

Two years after the pandemic, oil prices have recovered and are now $100+ per barrel, and the average gas price is roughly $4 per gallon in the US. Consumers and businesses have no choice but to pay the higher costs.

This reversal of fortune probably means OXY will have an excellent year letting it deleverage and return cash to shareholders. The company increased the quarterly dividend rate to $0.13 from $0.01 per share and is buying back $3 billion in shares.

The annual dividend rate is $0.52 per share, giving a forward dividend yield of 0.88%. The dividend is well covered by a payout ratio of ~7.2%.

The stock is still cheap, too, with a forward price-to-earnings (P/E) ratio of about 8.2X.

  • Ticker: OXY
  • Market Cap: $22.75 billion
  • Annual Dividend Rate (FWD): $0.52
  • Dividend Yield (FWD): 0.88%

Walmart

The second stock to beat inflation is Walmart (WMT). The company is the largest retailer in the world. Walmart has around 10,500 stores operating under the Walmart and Sam’s Club brands. In addition, the company has a presence in the US, Canada, Mexico, China, and other countries through joint ventures. Total revenue was about $572.75 billion in fiscal 2022.

Portfolio Insight - Earnings per Share WMT
Source: Portfolio Insight*

Walmart is a beneficiary during a period of high inflation. Rising prices caused by inflation mean consumers can afford less with the same $1. They may cut back on eating at restaurants and buying electronics, but they need to buy staples and essentials. Walmart is the low-price leader, and when prices are going up faster than income, Walmart and discount retailers benefit as consumers trade down.

For example, Walmart’s comparable sales are up during the pandemic and in the fourth quarter fiscal 2022 comparable sales continued to increase. For example, comparable sales rose +5.6% in the US, +8.3% in Mexico, +19.8% in China, and +4.6% in Canada. Sam’s club is doing even better with +16.3% comparable sales growth in the quarter.

Walmart is a dividend growth stock and has raised the dividend for 48 years, making it a Dividend Aristocrat. The forward dividend rate is $2.24 per share, giving a dividend yield of about 1.43%. The payout ratio is a conservative 34%.

Walmart’s stock price is rising, but it still trades at a reasonable valuation of ~23.3X within the average for the past 5-years.

  • Ticker: WMT
  • Market Cap: $432.25 billion
  • Annual Dividend Rate (FWD): $6.75
  • Dividend Yield (FWD): 1.43%

Chubb

Chubb Limited (CB) is the world’s largest global insurance and reinsurance firm operating in 54 countries. The company offers property & casualty (P&C) insurance, agricultural insurance, life insurance, commercial and specialty insurance, and reinsurance.

Chubb Overview
Source: Chubb Investor Relations

Chubb is benefitting from a period of higher insurance prices. However, it is rising interest rates that will help Chubb’s profits. High inflation has meant the US Federal Reserve is removing stimulus from the economy. The combination of tapering, interest rate increases, and reducing the Fed’s balance sheet puts upward pressure on interest rates.

This change will benefit Chubb’s investment income. As an insurer, the firm owns fixed income assets on its balance sheet to back its insurance policies. Rising interest rates mean these assets will generate more significant investment income. In fact, net investment income was a record $3.7 billion in 2021. Moreover, it will probably be higher in 2022 if interest rates keep rising in response to high inflation.

Portfolio Insight - Valuation CB
Source: Portfolio Insight*

Chubb is one of the longest dividend-paying stocks in the US, with more than 100 straight years of rewarding shareholders. Additionally, the firm is a Dividend Aristocrat, having raised its dividend for 29 consecutive years. The annual dividend rate is $3.20 per share, and the forward dividend yield is 1.52%. The dividend safety is solid, with a payout ratio of approximately 25%.

Chubb is trading at a valuation multiple of about 14.25X, within its average in the past 10-years.

  • Ticker: CB
  • Market Cap: $89.18 billion
  • Annual Dividend Rate (FWD): $3.20
  • Dividend Yield (FWD): 1.52%

Final Thoughts on Stocks to Beat Inflation

Inflation generally means higher costs for companies. Inputs such as commodities, materials, supplies, labor, and freight are higher. Some companies cannot recoup these higher costs quickly, and consequently, margins and profitability decline. As a result, the stock price usually drops too. 

However, some companies benefit, especially when their product has few alternatives, like oil and gasoline. Alternatively, companies that are the low-price leader may thrive as consumers trade down. Lastly, insurance companies and banks do better as the fixed income assets they hold on their balance sheet generate more investment income. As a result, the above three stocks may help your portfolio beat inflation.

Thanks for reading Stocks to Beat Inflation!

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