With inflation running hot, and expected to get worse before it gets better, how should you position your portfolio in response? This is a question that’s top of mind among many investors right now. The answer? Moving into safe stocks may be a smart move.
Sure, barring the volatility we saw in the market a few weeks back, inflation, plus issues tied to it, like the Federal Reserve’s tapering of its bond purchase program, have yet to result in a full-on market meltdown. But stocks could start to feel the pinch as an inflationary environment carries on. What happens once inflationary pressure starts to impact earnings? Or, if the Fed finally throws in the towel on its “inflation is transitory” thesis, and raises rates soon rather than later?
Stocks across-the-board could again make wild moves in the wrong direction. Richly-priced growth stocks that have benefited greatly from the current near-zero interest rate policy could see substantial multiple compression, or a decrease in their respective forward price-to-earnings (P/E) and price-to-sales (P/S) ratios.
That said, other stocks may prove resilient, or even thrive, in today’s changing market environment. Seeing more tailwinds than headwinds from rising inflation, and rising interest rates, these may be the best names to include in your portfolio to ride out today’s troubles. So, which recession-resilient safe stocks look like buys right now? Consider these seven, a mix of venerable names in the consumer products, energy and financial sectors:
- American International Group (NYSE:AIG)
- Bank of America (NYSE:BAC)
- BP (NYSE:BP)
- ConocoPhillips (NYSE:COP)
- Johnson & Johnson (NYSE:JNJ)
- Altria Group (NYSE:MO)
- Regions Financial (NYSE:RF)
Safe Stocks for Inflation: American International Group (AIG)
The financial sector is an era that can see more benefit than trouble from rising inflation. Why? With rising inflation typically comes rising interest rates. Rising interest rates means higher interest income for banks, and in the case of insurers, higher investment income from the “float” that arises from them collecting premiums before claims are paid out.
One such insurance stock that may benefit from this trend is AIG stock. Yes, based on how it blew up during the Great Recession more than decade ago, you may balk at me calling it a “safe stock.” But the situation here has changed dramatically since the late 2000s. This is today a profitable, well-capitalized provider of insurance, as well as retirement products such as annuities.
As one Seeking Alpha commentator recently made the case, American International Group may be one of the top financial stocks that can withstand inflation. With its likely ability to raise premium in line with rising prices, and the specter of it generating higher investment income from its float as rates rise, it may continue to beat analyst earnings estimates as it’s done for four quarters in a row.
Priced at just 11.1x its estimated 2022 earnings, with good chances its results beat consensus ($5.38 per share), and come in at the top line of estimates ($6.06 per share), consider AIG stock a cheap, safe hedge against inflation at today’s prices (around $59.29 per share).
Bank of America (BAC)
Again, an inflationary environment points to rising interest rates. In turn, rising rates provide a direct boost to institutions like banks, as net interest income increases, with a minimal increase in costs. With this, you may want to buy BAC stock now.
Riding out the worst of the Covid-19 pandemic in 2020, and flying high when the U.S. economy entered “recovery mode,” Bank of America shares have performed well over the past twelve months. It’s up around 95% in the past year, and up 55% year-to-date. I wouldn’t count on shares making another 50% or even 100% move in the year ahead.
Yet compared to other stocks, it may hold up well. Better yet, it may be able to add to its stunning gains, with further gradual moves higher thanks to the prospect of rising rates. Plus, the continuation of its stock buyback plan that it announced back in April will help its price action.
I will admit, however, with its valuation reasonable relative to other banks (earnings multiple of 14.95x), and the expectations its earnings will decline next year, there may be some challenges in it moving higher. That said, if recent trends continue (rising deposits helping it beat quarterly earnings expectations), and trends like rising interest rates pick up, BAC stock could surprise in the forthcoming quarters.
Safe Stocks for Inflation: BP (BP)
Besides financials, stocks with commodities exposure (like oil stocks) are great places to invest in an inflationary environment. Investors have many choices when it comes to oil & gas plays. But a top one they may want to consider is BP stock.
Why BP? For starters, shares in the U.K.-based energy giant are cheap. The stock trades at a high single-digit P/E ratio (8.7x). This is despite the prospect of it seeing strong earnings in 2022 and crude oil prices remaining at multi-year highs (above $80 a barrel).
Second, it could prove to be resilient if rising inflation/rising rates cause further stock market volatility. This is due to it seeing more tailwinds than headwinds from inflation. In addition, its high dividend yield (4.4%) helps to provide investors with a consistent return. Like with my designation of AIG stock as “safe,” some may balk too at my assertion that BP belongs in the safe stocks category.
However, high inflation should help to keep energy prices high, preventing a major reversal in earnings. With regards to another concern–oil companies vulnerable to the “green wave”)–this more forward-thinking oil company has you covered. As my InvestorPlace colleague Faisal Humayun wrote back in July, with its heavy exposure to the renewable energy space, it stands to gain rather than lose big should fossil fuel go out of vogue for green energy. Put it all together, and BP stock is a buy at around $30 per share.
Even among integrated oil & gas stocks, shares in ConocoPhillips have performed well in 2021. Shares in peers like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are up 52.5% and 32.3% year-to-date, respectively.
But COP stock? It’s up a staggering 87% since the start of the year. This, plus the fact it sports a lower forward dividend yield (2.44%) than XOM (5.48%) and CVX (4.74%) may dampen its appeal to some. Look at its details, though, and you’ll see why this may be the better of the U.S.-based integrated energy stocks to buy.
Regarding its low yield, this is countered by its low payout ratio (around 36%), which is well below the nearly 75% payout ratios seen with the two rivals discussed above. This gives it substantial room to increase its rate of payout over time. Especially since its earnings, bolstered by high oil prices and deals such as its purchase of Permian Basin assets from Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B), are set to soar next year.
In 2022, analyst consensus calls for earnings to rise from $5.12 per share, to $6.51 per share. Better yet, the top end of estimates call for it to earn $9.30 per share. A safe stock that gains rather than loses from inflation, keep COP stock on your radar.
Safe Stocks for Inflation: Johnson & Johnson (JNJ)
We’ve taken a look at safe stocks in financials and energy. Now, let’s look at another name that could stay strong. Whether through further market volatility, or from continued high inflation.
This isn’t the first time I’ve called Johnson & Johnson a safe stock. Back in August, I made the argument why there’s more to like about the healthcare giant than just its exposure to the Covid-19 vaccination push. Namely, its underlying strengths (high margins, strong balance sheet), plus its status as a dividend aristocrat gives it more than others in the industry might. For the past 59 years, it’s raised its dividend, making it one of the most kingly of the so-called aristocrats.
Now, with inflation more top of mind than ever, there’s something else to like about JNJ stock. That would be its appeal as a hedge against inflation. With greater flexibility to raise prices in line with rising costs, the company’s consumer health, pharmaceutical, and medical device units should continue to perform well.
An established, blue chip stock, owning Johnson & Johnson may not make you rich. But sporting a 2.59% yield that will likely continue to rise over time. With its high chance of staying resilient to possible stormy times ahead, it could deliver solid, stable returns to your portfolio.
Altria Group (MO)
Your opinion on this company’s controversial business (tobacco) notwithstanding, it’s hard to deny the appeal of owning MO stock during an inflationary environment. Still cheap due to the perception that its best days are behind it, with a 7.43% yield, its one of the few dividend stocks outside of energy or financials offering a payout that’s above today’s more than 5% inflation rate.
Some may see this high yield as just a consolation prize for investors in Altria Group stock to make up for the fact the decline in cigarette smoking means lower profits (and a lower stock price) in the years ahead. There is also the “disruption” in business by non-combustible alternatives like vaping that have affected it’s valuation. Then of course there is the further dilution of the inhalables market with the marijuana industry taking off.
As you may know, the company itself is participating in the disruption itself, via its game plan to move beyond smoking. After several years of headwinds with its investment in Juul, things could be getting better, as the FDA’s scrutiny of vaping may be set to ease.
With Altria also having the flexibility to raise prices, results look likely to come in line with estimates. Low single-digit earnings growth may not be exactly setting the world on fire. But you don’t need that with defensive play like MO stock. As long as the company keeps chugging along with its high-yield, it should stay stable during rockier times.
Safe Stocks for Inflation: Regions Financial (RF)
To cap off this list of safe stocks, let’s take a look at a less well-known name in the financial services space. As the name may suggest, Regions Financial is a regional bank. Based in Birmingham, AL, its operations are concentrated in the Midwest and Southern United States.
Bank stocks in general make for great inflation plays. Yet you may be asking, what in particular makes this one appealing? For one, besides its potential to see stronger earnings thanks to rising interest rates, it’s a high yielding name. Its forward dividend yield today (based on the current RF stock price of $23.24 per share) stands at around 2.78%. Its payout ratio, at 28%, leaves plenty of room for dividend increases.
Plus, as our Louis Navellier has pointed out, the “regions” Regions operates in are another aspect of its appeal. Concentrated in areas seeing net population inflows, thanks to work-from-home trends, it has strong potential to benefit from deposit/loan growth.
Cheap at a forward P/E ratio of 10.7x, this more under-the-radar banking stock may be up 44% year-to-date. But with the factors listed above, it could prove resilient in a possible market downturn. Or, perhaps see additional gains, as rising rates enable it to deliver results ahead of expectations.
On the date of publication, Thomas Niel held a long position in MO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.