Skip to main navigation or content
You are here:
As our main feature showed, what you need in times of stubbornly high inflation are shares in companies with pricing power - who aren't going to get caught in a margin squeeze between stagnant selling prices and rising input costs. Here are our seven suggestions. The links point to pages containing more articles and data about those companies.
Advertising
In times of high inflation, few companies benefit more than those that have strong and growing dividends. National Grid's decision to recommend a 15 per cent increase in dividend for the current financial year and a target of 8 per cent annual increases in 2012 highlights that point. In fact, Over 95 per cent of its revenues come from regulated assets or long-term contracts.
Fund manager F&C's director of UK equities, Julian Cane, says that utilities like National Grid form an essential part of his portfolio: "The companies have genuine pricing power because they are in a monopolistic position – a criteria that is essential in times when input costs are rising."
National Grid, which owns power infrastructure, achieved a win with December's acceptance of a five-year price control period from regulator Ofgem, giving us confidence it will be able to meet its dividend promises.
Adding to its defensive quality for investors, after an acquisition last year National Grid is the third biggest player in US energy delivery.
ROYAL DUTCH SHELL AND BP
One of the root causes of inflation is higher energy costs. At just over $100 a barrel, oil has risen just over 60 per cent in the past 12 months, and has almost tripled in the past five years.
It makes sense to invest in the big guns in this sector, because of their strong production profile, which generates literally billions of pounds, and gives them the flexibility to invest in exploration, to ensure future revenues.
Royal Dutch Shell for example entered the history books in January, reporting the highest profits ever recorded by a UK-quoted company. Its full year earnings for 2007 were $27.6bn on the industry standard "replacement cost" basis.
Competitor BP had a tough year suffering from problems at its US refineries, but still managed to achieve earnings for 2007 of $17.3bn.
The strong cash generation of these companies should not be underestimated, despite efforts at finding replacement fuels such as ethanol and other "bio" or plant based fuels.
Both companies are actively investing in higher cost alternative sources such as oil sands, which signals that long-term they feel that the oil price is set to remain elevated.
Jupiter Asset Management's Tony Nutt likes to call them "goods of ostentation" and they refer to those products that wealthy consumers buy and aren't effected by general downturns in demand.
Included among these products are drinks such as Johnny Walker and Guiness.
Long time supporter of Diageo and fellow fund manager Nick Train agrees and says that the beverages giant should be able to push up the price of drinks like Johnnie Walker and Smirnoff Vodka by at least the rate of inflation.
The group's half year result in January must have given it a boost. Diageo was able to reiterate its 9 per cent full-year target for operating profit, prior to the inclusion of profits from acquisitions.
The global exposure of Diageo is also a good hedge against domestic inflation. In 2007 Johnnie Walker sales grew 16 per cent in the international division, which was dominated by sales in Mexico and the Middle East. The whisky is also proving popular among the newly affluent Chinese middle class. In the total Asia Pacific region Scotch whisky sales were up 50 per cent.
In periods of high inflation, cost cutting becomes an imperative for companies, in order to try to maintain profitability. So companies that provide outsourcing and support services can find themselves in high demand.
One of the companies in this space is Capita. Value and Income Trust fund manager Angela Lascelles says that her portfolio contains outsourcing companies because of constant demand for their services no matter what the economic conditions. "Companies are made to be more efficient all the time and Capita and smaller ones like BPP in training provide them with avenues to cut costs."
The added benefit for investors in Capita is that its contracts are all long-term and stipulate the cost savings their customers will receive.
Tony Nutt has been buying healthcare plays such as Southern Cross Healthcare in the past few months rather than pharmaceutical companies. Both have earnings that are linked to the ageing population, which will drive demand for their products. But Mr Nutt believes that pharma companies are unable to raise prices much because of generic substitutes and government and insurers looking to lower prices. In contrast, with demand so buoyant, there are fewer barriers to raising the prices of residential and domiciliary care.
Both companies benefit from contracts that have long life spans and are more often than not renewed.
Southern Cross is the largest residential care provider in the country. Its shares almost halved in three months to late January due to abrupt senior management departures and earnings downgrades. But in the past few months its shares have bounced back as investors recognised the resilience of its earnings in the longer-term.
Care UK's shares halved last year after the National Health Service cancelled on of its clinical care contracts. Its shares have rebounded this year as investors focused on the profits made at its social care division, which generates most of its earnings.
The UK’s No.1 Stockbroker
Access a selection of share tips, comprehensive company analysis and full financial data on listed companies. Plus portfolio tools with advanced alerts when you register for free here.
Advertorial Feature
With so many big moves in the world's financial markets, there have seldom been more opportunities around for spread traders. Isn't it time you joined them?
by Dominic Piccarda
© The Financial Times Limited 2008. All rights reserved. "Investors Chronicle", "FT" and "Financial Times" are trademarks of The Financial Times Limited. No part of these web pages may be reproduced or transmitted to or stored in any other website or other form of electronic retrieval system, without prior permission in writing from the editor.
Warning: Do remember, particularly if you are new to stock market investment that the prices of shares and other investments can fall sharply. You may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. This site is aimed at UK residents only. To read more please see our Important Warning
-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
