- These are six stocks to buy during a period of high inflation, given their brand power, pricing ability and high need by consumers.
- Exxon Mobil (XOM): This company refused to cut its dividend during the Covid crisis.
- The Procter and Gamble Co. (PG): This company has had 66 years of annual consecutive dividend increases.
- The Coca-Cola Company (KO): This $283 billion stock will have steady earnings and dividends during a recession.
- Apple (AAPL) – Just raised its dividend – trades for 26 times earnings and a 0.58% yield;
- Chubb Limited (CB) has paid the same dividend for four quarters – likely to hike in May – 13.9x P/E and 1.56% yield;
- AT&T (T): AT&T is now free of its loss-making entertainment divisions and can focus on steady telecom revenue.
These are six stocks to buy that have pricing and demand power. Moreover, most of them have paid continuous dividends, even during previous inflationary periods.
High rates of inflation can destroy a company’s profitability, especially if it cannot pass on to its customers any increases in its costs. In addition, if inflation expectations take root in consumers’ minds, where they expect higher prices continuously, their level of demand for products will fall. This affects the top line of many companies, but less so where the demand for their products is inelastic, i.e, won’t change.
The Bureau of Labor Statistics (BLS) is set to announce the Consumer Price Index (CPI) inflation number for April on May 11. Last month it reported that the CPI had risen to 8.5% over the last 12 months.
This is the seventh month in a row that the CPI has risen. Investors will be anxiously waiting to see if the April CPI shows a further accelerating increase.
Let’s dive in and look at these six stocks.
|XOM||Exxon Mobil Corporation||$86.22|
|PG||The Procter & Gamble Company||$154.72|
|KO||The Coca-Cola Company||$64.74|
Stocks to Buy That Counter Inflation: Exxon Mobil (XOM)
Market Cap: $362 billion
Exxon Mobil (NYSE:XOM) has huge pricing power in a period of high inflation as everyone needs to buy gasoline. Analysts expect that its EPS will reach $10.02 this year and (assuming lower oil prices) $8.61 next year. At $90.31 on May 5 XOM stock has a cheap price-to-earnings (P/E) multiple of just 9.6x this year and 11.4x next year’s earnings.
Exxon Mobil pays $3.52 annually, giving it a 4.17% dividend yield. Its payout ratio is solid at 51.47%, even using the lower 2023 forecast of $8.61.
Exxon refused to do so during the height of the pandemic. I wrote about this in a separate InvestorPlace article a year ago. Exxon could afford to do this as it was not buying back shares at the time.
Exxon has since restarted its share buyback program. It has cut out $9 billion in extra costs, as shown in its recent Investor Day presentation. This makes its payout ratio stronger. Exxon’s strong dividend yield is a sign the company will last through a severe inflation or recession period.
The Procter and Gamble Co (PG)
Market Cap: $373.7 billion
The Procter and Gamble Company (NYSE:PG) is a consumer goods powerhouse with many popular brands. It has had 66 years of annual dividend increases. That covers many periods of inflation, recession, war and other turbulent times. In each of these volatile periods, it has never stopped raising its dividend.
The simple underlying reason for that is the pricing and brand power of its underlying products. This feeds into its powerful cash flow. This powerful cash flow allows it to keep paying and raising its dividend. That is exactly the kind of stock you want to own during a period of high inflation and/or a recession.
In the last 10 years, P&G has had an average compound dividend growth rate of 5.13% each year according to Seeking Alpha. This implies it will keep growing its dividend going forward.
Stocks to Buy That Counter Inflation: The Coca-Cola Company (KO)
Market Cap: $282.7 billion
The Coca-Cola Company (NYSE:KO) is a $283 billion stock that will have steady earnings and dividends during a recession. The company’s latest earnings report shows that it is still producing large amounts of free cash flow (FCF).
As a result of its powerful brand worldwide, Coca-Cola has been able to pay a higher dividend for each of the past 59 years. This, again, is evidence of its very powerful cash flow. It has been able to withstand recessions, high inflation periods and all kinds of other volatile economic periods.
In the last 10 years, its compound annual growth rate (CAGR) of dividends was 5.88%. That history is going to help the company power through a recession, and the stock will do well as a result.
Apple Inc (AAPL)
Market Cap: $2,499 billion
Apple Inc. (NASDAQ:AAPL) has paid consistently higher dividends for the past nine years. In addition, it just announced its 10th consecutive higher dividend at the end of April 28. As a result, its annual dividend is set at 92 cents, giving it a dividend yield of 0.58% as of May 10.
The reason why AAPL stock is set to be a good stock to own is due to its strong brand name and its strong free cash flow generation. It is likely to keep raising its dividend even during a period of inflation and a possible recession.
For example, Apple produced $28.098 billion in FCF during Q1. Its dividend expenses were just $3.595 billion. So it has plenty of room to keep raising its dividend. This makes it one of the best stocks to buy during a period of high inflation and possibly a recession.
Stocks to Buy That Counter Inflation: Chubb Limited (CB)
Market Cap: $88.48 billion
Chubb (NYSE:CB) is an insurance and reinsurance company that has paid a consistent dividend over the past eight years and has grown its dividend over the past two years. Chubb has paid the same dividend for the past four quarters and is likely to hike it again at the end of May. As it stands, CB stock has a price-to-earnings (P/E) multiple of 13.9x and a 1.56% yield.
This makes it a solid earning company. Insurance companies tend to do reasonably well, in that they do go out of business during periods of high inflation. The reason is that insurance tends to get paid by most people during high inflation periods as its price increases tend to lag.
Market Cap: $140 billion
AT&T cut its dividend to $1.11. At today’s price of $19.54 as of May 10, that gives it a 5.54% dividend yield. This is secure since AT&T says this will be about 40% or so of its FCF. Moreover, as a result of the WBD transaction, AT&T received $43 billion, which it’s using to pay down debt.
This also makes the dividend very secure on an ongoing basis for investors. As a result, the dividend payout ratio looks very comfortable.
For example, for 2023, 21 analysts surveyed by Refinitv forecast its earnings per share at $2.59. That means the $1.11 dividend per share is only 42.9% of forecast EPS. This brand-name stock looks like one of the best stocks to buy during a period of inflation or a recession.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.