Stagflation is an ugly mix of low economic growth punctuated by high unemployment. And at the root of it all is inflation. For a long time, many economists believed that stagflation was not possible. However, the 1970s changed that thinking. Not only were U.S. consumers facing high inflation, they were also dealing with high unemployment.
And according to some analysts, history may be getting ready to repeat itself. While economists seem to be split on the probability of a recession, there is growing concern that the United States is entering a period of stagflation. In an effort to combat inflation, the Federal Reserve is pledging to aggressively increase interest rates. There's already evidence of slowing economic growth and waning demand. The next shoe to drop may come in the employment numbers.
This means that investors need to turn their attention to stocks that have the attributes to combat stagflation. This includes companies that have the potential to deliver strong free cash flow. One reason for this is that a healthy cash flow can be applied to reward shareholders with a dividend. And that can boost the total return. Here are seven stocks that can help investors do just that.
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- Kroger
- CVS Health
- McDonald’s
- Johnson & Johnson
- Exxon Mobil
- Blackstone
- B2Gold Corp
#1 - Kroger (NYSE:KR)
First up on this list of stagflation stocks is Kroger (NYSE:KR). Whenever analysts “strip out” food and gas from inflation numbers it makes me laugh. It’s not that I believe they’re fudging the numbers, but food and gas are where consumers can’t avoid inflation. And the thing about food prices is once they go up, they have a tendency to stay up. That’s what puts Kroger on this list.
The grocery company is, to date, successfully passing along higher grocery costs to its customers. And that is one reason why the company is seeing year-over-year (YOY) earnings per share (EPS) growth of approximately 10% in each of its last several quarters. Investors will find out in the next quarter or two if the company will increase its dividend. However, with the sizable amount of free cash flow (FCF) the company is generating, the dividend will likely be increasing for the 17th consecutive year.
About Kroger
The Kroger Co operates as a food and drug retailer in the United States. The company operates combination food and drug stores, multi-department stores, marketplace stores, and price impact warehouses. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; and multi-department stores provide apparel, home fashion and furnishings, outdoor living, electronics, automotive products, and toys.
Read More - Current Price
- $57.61
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 8 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $60.09 (4.3% Upside)
#2 - CVS Health (NYSE:CVS)
Another defensive stock to help combat inflation is CVS Health (NYSE:CVS). The company is the largest U.S. pharmacy health care provider. The company reported its first-quarter earnings in early May and had a 10% YOY beat in both EPS and revenue. This was the third consecutive quarter that the company posted a YOY beat on EPS.
CVS has been growing its FCF at an impressive pace for the last four years. In 2021, the company posted a record of over $15 billion in FCF. As the company’s fiscal year came to a close it announced an increase in its dividend. That means investors may have to wait a few quarters for a dividend increase. But with a healthy pile of cash on hand, the existing dividend looks quite safe. Analysts tracked by MarketBeat give the stock a consensus price target of $116.53 which leaves about 21% upside for investors.
About CVS Health
CVS Health Corporation provides health solutions in the United States. It operates through Health Care Benefits, Health Services, and Pharmacy & Consumer Wellness segments. The Health Care Benefits segment offers traditional, voluntary, and consumer-directed health insurance products and related services.
Read More - Current Price
- $56.83
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 13 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $72.28 (27.2% Upside)
#3 - McDonald’s (NYSE:MCD)
Continuing with our theme of defensive stocks brings us to McDonald’s (NYSE:MCD). During the pandemic, McDonald’s proved that its investment in digital paid off. The company continued to deliver strong results during the pandemic. And now the fast-food giant is delivering YOY beats on earnings and revenue that go back to before the pandemic.
This is reflected in the company’s FCF that increased by 53% in 2021. Not only does this make it likely that McDonald’s will make it 47 consecutive years of dividend increases later this year. And keep in mind that the company already pays out a rich dividend that currently amounts to $5.52 per share on an annual basis. It may also offset investor concerns that the company will be under increasing cost pressure with rising wages and its continuing investment in automation.
For what it’s worth, analysts give MCD stock a 12% upside with a consensus price target of $281.74.
About McDonald's
McDonald's Corporation operates and franchises restaurants under the McDonald's brand in the United States and internationally. It offers food and beverages, including hamburgers and cheeseburgers, various chicken sandwiches, fries, shakes, desserts, sundaes, cookies, pies, soft drinks, coffee, and other beverages; and full or limited breakfast, as well as sells various other products during limited-time promotions.
Read More - Current Price
- $290.89
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 12 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $319.46 (9.8% Upside)
#4 - Johnson & Johnson (NYSE:JNJ)
The final defensive stock on this list is Johnson & Johnson (NYSE:JNJ). As with many sectors, there are several attractive options in the pharmaceutical space. Some people may prefer Pfizer (NYSE:PFE), I’ll give the nod to JNJ because it offers exposure to both the pharmaceutical and consumer essentials space.
But that’s also why JNJ may not be a long-term play. The stock is showing tepid growth this year after the company announced it was going to spin off its consumer products division into a separate company. This is projected to happen in 2023. However, in the meantime, the company continues to generate consistent FCF that was $19.75 billion in 2021, down just a shade from the over $20 billion it generated in 2021.
And that growth is reflected in the company’s dividend which Johnson & Johnson just increased for the 61st consecutive year. This will keep JNJ in the exclusive group of stocks known as Dividend Kings.
About Johnson & Johnson
Johnson & Johnson, together with its subsidiaries, researches, develops, manufactures, and sells various products in the healthcare field worldwide. The company's Innovative Medicine segment offers products for various therapeutic areas, such as immunology, including rheumatoid arthritis, psoriatic arthritis, inflammatory bowel disease, and psoriasis; infectious diseases comprising HIV/AIDS; neuroscience, consisting of mood disorders, neurodegenerative disorders, and schizophrenia; oncology, such as prostate cancer, hematologic malignancies, lung cancer, and bladder cancer; cardiovascular and metabolism, including thrombosis, diabetes, and macular degeneration; and pulmonary hypertension comprising pulmonary arterial hypertension through retailers, wholesalers, distributors, hospitals, and healthcare professionals for prescription use.
Read More - Current Price
- $153.10
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 8 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $175.94 (14.9% Upside)
#5 - Exxon Mobil (NYSE:XOM)
Investors looking to “play the matchups” when it comes to rotating their holdings, it’s time to look into the energy sector. Consumers already know that Exxon Mobil (NYSE:XOM) is benefiting from rising oil prices. However, the company also looks well-positioned to hold up in a period of slow economic growth.
After reporting negative FCF in 2020, the company rebounded with an impressive $36 billion in FCF in 2021. And in the first quarter of 2022, Exxon Mobil posted a sizable beat on both the top and bottom lines. This makes it likely that there’s likely to be a lot more room for this cyclical stock to run.
That’s a narrative that isn’t playing out right now with analysts who suggest the stock price may decline. However, investors are getting a very generous dividend which currently pays out $3.52 per share on an annual basis. And Exxon Mobil is a dividend aristocrat having increased its dividend in each of the last 38 years.
About Exxon Mobil
Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas in the United States and internationally. It operates through Upstream, Energy Products, Chemical Products, and Specialty Products segments. The Upstream segment explores for and produces crude oil and natural gas.
Read More - Current Price
- $120.35
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 11 Buy Ratings, 8 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $130.21 (8.2% Upside)
#6 - Blackstone (NYSE:BX)
For a different way to give your portfolio a hedge against stagflation, investors may want to consider Blackstone (NYSE:BX). The company is an alternative asset management firm that specializes in early-stage companies in real estate, private equity, hedge fund solutions, credit, secondary funds of funds, public debt and equity, and multi-asset class strategies.
The company is delivering significant YOY growth in earnings and revenue. That’s likely one reason that the company is generating significant interest from institutional investors in the last two quarters. And an environment of rising interest rates will likely serve as a tailwind for continued growth.
Blackstone more than doubled its FCF growth from 2020 to 2021. Although not a real estate investment trust (REIT) it operates in a similar fashion, including paying out 80% of its profits as dividends. Currently, that dividend is worth $5.28 on an annual basis and has a dividend yield of 4.56%.
About Blackstone
Blackstone Inc is an alternative asset management firm specializing in real estate, private equity, hedge fund solutions, credit, secondary funds of funds, public debt and equity and multi-asset class strategies. The firm typically invests in early-stage companies. It also provide capital markets services.
Read More - Current Price
- $185.03
- Consensus Rating
- Hold
- Ratings Breakdown
- 6 Buy Ratings, 13 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $157.63 (14.8% Downside)
#7 - B2Gold Corp (NYSEAMERICAN:BTG)
If you’re an investor with a healthy risk appetite and an affinity for penny stocks, B2Gold Corp (NYSE:BTG) may fit the bill. The British Columbia-based company is a senior gold miner that operates mines in Mali, the Philippines, and Namibia among other locations.
In times of stagflation, gold tends to shine. That’s because slower economic growth combined with high inflation makes real rates (nominal rates minus inflation) trend lower. This gives gold a lower carrying cost that theoretically offers better protection against inflation.
The proof will be in the production which the miner expects to be 1.1 million ounces at the high end. That would be an increase from the 1 million ounces it produced in 2021. However, that may be offset by a higher all-in production cost which is forecast to be between $1,010 and $1,050 per ounce.
Plus, investing in a mining stock is a good way for investors to get exposure to precious metals while collecting a dividend that currently has a 3.8% dividend yield.
About B2Gold
B2Gold Corp. operates as a gold producer company. It operates the Fekola Mine in Mali, the Masbate Mine in the Philippines, and the Otjikoto Mine in Namibia. The company also has an 100% interest in the Gramalote gold project in Colombia; 24% interest in the Calibre Mining Corp.; and approximately 19% interest in BeMetals Corp.
Read More - Current Price
- $2.83
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 2 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $3.78 (33.6% Upside)
Even if the United States is not headed for stagflation, investors need to account for two realities. First, inflation is not going away anytime soon. Even if inflation has peaked, it will take many months before Americans begin to feel relief.
And second, that inflation means investors will face a lingering period of uncertainty. Rising prices bring lower demand. Lower demand creates uncertainty in consumers' minds about their job security. This creates a spiral in which consumers spend less and economic growth continues to slow. All of which are likely to be reflected in corporate earnings in the coming quarters.
However, slower growth doesn't mean zero growth. Investors just need to know where to look. While it may be comfortable to sit on cash in the short term, that's not a long-term solution.
The stocks in this presentation are good options for investors looking for ways to boost their total return.
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