2 Stocks for Lasting Inflation

Inflation is back. It’s a big problem for the first time in four decades and the reason it has been a bear market.

It’s a stunning change. After averaging less than 2% per year over the last two decades, inflation averaged 7% in 2021 and 6.5% in 2022. The Fed has raised the Fed Fund rate in response by 4.5% in a year, the steepest Fed rate hiking cycle in decades.

The Central Bank’s efforts to tame this inflation appear to be working, albeit slowly so far. The headline inflation number, or CPI (the Consumer Price Index), has declined for eight consecutive months, from 9.1% in June to 6% in February. While still a long way from the 2% Fed target, inflation is clearly moving lower.

Inflation is likely to continue declining over the course of this year as the effects of the Fed rate hikes ripple through the economy. A slowing economy tends to drive inflation lower as demand for goods and services decreases. The recent banking crisis will likely result in decreased lending activity for banks, further slowing economic growth and putting downward pressure on inflation.

I wouldn’t be surprised if, in a couple of months, inflation talk goes out of vogue with investors and the new bogeyman becomes recession. Hopefully, this inflation will fade away and cease to be a big problem by the end of the year. But history says that’s unlikely.
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In the past, when inflation has stayed this high for this long it has taken about a decade to get rid of. That’s why inflation averaged 7.25% in the 1970s and 5.82% in the 1980s.

Sure, inflation is likely to be lower a year from now. But high inflation can come right back again in the next recovery. That’s what happened in the ’70s. It has historically taken considerable economic pain to tame inflation. The Fed will need to keep rates high even after the economy turns south. But next year is an election year. Central bankers will face massive pressure to lower rates and get the economy cooking again.

If history repeats itself, this inflation fight is far from over.

Inflation changes the investment landscape. Certain stocks and sectors that benefitted mightily from the low inflation and low interest rates of the past couple of decades will struggle in this new normal. It’s likely that different kinds of stocks will outperform in the years ahead. Not only is there more to overcome, but we’ll have to shift tactics to be successful.

Here are two stocks that can thrive even if inflation hangs around.

Lasting Inflation Stock #1: Visa (V)

Yield: 0.82%

Visa is a global payments technology company that provides a digital currency instead of cash and checks to individuals and businesses in more than 200 countries and over 160 currencies. It is the largest payment processor in the world with systems that can process 65,000 transactions per second.

Visa doesn’t loan money. You can charge things with a Visa card instead of using a debit, but it is the sponsoring bank that loans the money, not Visa. It’s the bank’s problem if someone can’t pay. Visa simply collects a fee on any debit, credit or mobile transaction. It rings the register every time individuals and businesses all over the world make a digital transaction with its cards.

Cashing in on transactions is practically a license to print money. The dominance of this company and stock in the past is undeniable. Look at the returns for the last 5-, 10-, and 15-year periods for V versus the overall market (with dividends reinvested as of 3-16-2023).

The future looks bright as well. The global trend toward cashless transactions is gaining traction. In fact, digital payments surpassed cash transactions on a global basis a few years ago. The trend will accelerate going forward, and Visa is in the ideal position to benefit.

Despite having a commanding market share in the electronics payment industry already, there is still plenty of runway for growth as more people go cashless and the global middle class continues to expand. Visa’s size and scale should allow the company to improve its already sizable margins.

The stock should hold up in inflation. Transaction amounts will reflect higher prices and Visa has a relatively low amount of debt, which should enable the company to fare relatively well with higher interest rates.

Lasting Inflation Stock #2: ONEOK, Inc. (OKE)

Yield: 5.9%

ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, midcontinent, and Permian regions in key market centers, and also has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.

Here are some things to like about the company and stock.

· Investment grade-rated debt

· 85% of earnings fee-based

· 26 years of stable and growing dividends

· C corporation structure (generate a 1099 and not a K1)

Earnings are resilient because ONEOK operates in the best segments and is well-positioned in the high-growth shale regions. Natural gas is a rapidly growing fuel source that is much cleaner burning than oil or coal. NGL is by far the fastest-growing fossil fuel source. During the pandemic, in one of the worst years ever for the energy industry, ONEOK’s NGL and dry natural gas volumes both continued to grow anyway.

OKE pays a stellar 5.9% yield. That’s not too good to be true for several reasons. The company has grown or maintained the payout for 26 straight years that include recession and terrible energy environments. It has also grown the dividend at a better than 8% average annual clip for the last five years.

Why buy it now?

OKE returned a solid 16.46% in 2022. That was about on par with the rest of the midstream energy subsector. But performance had been much better than its peers. The stock returned a stellar 68% in 2021. The lower relative performance last year was for two reasons. One, after the huge 2021 performance, it didn’t have as much ground to make up. Two, earnings didn’t grow as strongly as much of the sector last year because they never decreased very much during the pandemic.

ONEOK also has automatic inflation adjustments built into its contracts. The company doesn’t have to compete on price because, as do most midstream energy companies, it operates a near monopoly in its area. It will pass higher costs on to its customers and demand is likely to remain resilient because of the high demand for natural gas both in the U.S. and globally.

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