The U.S. inflation data for June was published this week and was less than encouraging. In June 2022, the consumer price index rose 9.1% year-over-year compared to estimates of 8.8%. After excluding energy prices and food, CPI stood at 5.9%, compared to forecasts of 5.7%.
Inflation is hovering near 40-year highs making policymakers and investors extremely nervous.
To offset inflation, the Federal Reserve has increased interest rates in 2022, with additional hikes expected in the future. The double whammy of rising commodity prices and higher bond yields is likely to impact companies' revenue and profit margins negatively.
As revenue and earnings for companies are likely to decline in 2022, valuations across sectors have fallen off a cliff. The tech-heavy Nasdaq Composite index entered bear market territory recently and is down almost 30% from all-time highs.
However, a few companies are better equipped to deal with an inflationary environment as they enjoy pricing power. Here, we look at three such stocks part of the S&P 500 you can buy amid rising inflation rates.
Coca-Cola (NYSE: KO) is a company that is also part of Warren Buffett's storied portfolio. Valued at a market cap of $270 billion, Coca-Cola is among the most well-known brands globally. In Q1 of 2022, its sales grew by 16% year-over-year to $10.5 billion, while adjusted earnings surged by 16% to $0.64 per share. Its operating margin expanded to 32.5% in Q1, up from 30.2% in the year-ago period, showcasing its wide economic moat and pricing power.
Coca-Cola has successfully transferred the increases in raw materials prices to consumers keeping its profit margins healthy. Analysts tracking the stock expect earnings to rise by 6.6% annually in the next five years, which should allow the consumer products giant to increase dividends in the future.
Coca-Cola's robust business model has allowed the company to increase dividends yearly for 60 consecutive years and offers investors a forward yield of 2.8%.
Albemarle (NYSE: ALB) is the largest producer of lithium for electric vehicle batteries. Valued at a market cap of $22 billion, Albemarle has returned 7.4% to investors in the last year. Lithium prices have recently experienced a massive uptick due to solid demand from EV manufacturers, driving Albemarle stock higher by 200% since August 2019.
In May, Albemarle increased its forecasts for 2022 on the back of higher realized lithium prices and renegotiation of customer contracts. Analysts tracking the stock expect revenue to rise by 90% to $1.49 billion and earnings to rise by 258% to $3.19 per share in Q2 of 2022.
The company's lithium sales in the March quarter almost doubled to $550 million. Around 66% of its revenue growth was attributed to increased commodity prices, while volume increases drove the top-line higher by 31%.
Albemarle generates 49% of total sales from the lithium business, accounting for two-thirds of its adjusted EBITDA.
The final stock on my list is NextEra Energy (NYSE: NEE), one of the largest renewable energy companies in the world. It is also the largest electric utility company in the U.S., valued at $157 billion by market cap.
NextEra is a Dividend Aristocrat and has increased dividends for 26 consecutive years. It currently offers investors a dividend yield of 2%.
Utility companies provide essential services, making them recession-resistant. These companies are well positioned to generate cash flows across business cycles as electricity demand remains unchanged year-over-year.
Between 2020 and 2022, NextEra energy has forecast to spend around $55 billion in capital expenditures allowing it to widen its base of cash-generating assets considerably.
Analysts tracking the stock expect earnings to rise by 9% annually in the next five years, and NextEra expects dividends to increase by 10% through 2024.
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