Inflation is an unavoidable consequence of a market-based economy. In the best case, inflation is fueled by rising consumer demand, which itself is triggered by rising wages. That's why the Federal Reserve has a target rate of 2% inflation. A little inflation can be helpful to an economy.
But in 2024, inflation has become a little like that annoying dinner guest who has overstayed their welcome. Many Americans don't want it to go away angry; they just want it to go away.
It seemed like that was happening in 2023. Investors and analysts were optimistic about disinflation. That is, a slowdown in the rate of inflation. Prices weren't dropping, but they weren't going up as quickly as they did in 2022.
But the February readings of consumer prices (CPI) and producer prices (PPI) show inflation may be heating up. And this time, it's not necessarily about consumer demand. This round is about government spending, geopolitical concerns, and (slightly) rising oil prices.
But as investors, you know that some stocks do very well in times of inflation. These are defensive stocks that come from companies that make products consumers can't do without.
That's the focus of this special presentation. However, one thing to note about each of these stocks is that analysts expect them to do well even if inflation remains muted. But if the rate of inflation ticks higher, these stocks are likely to outpace the market.
Quick Links
- Walmart
- Occidental Petroleum
- Eli Lilly
- Merck & Co.
- Mondelez International
- McCormick
- Kimberly-Clark
#1 - Walmart (NYSE:WMT)
Walmart Inc. (NYSE: WMT) reported earnings earlier this week and delivered what investors expected. The retailer beat on the top and bottom lines and issued guidance that was in line with analysts' expectations for 2024.
The main issue is not that consumers aren't spending. But there continues to be evidence that they're cutting back on discretionary purchases. Nevertheless, Walmart historically captures market share when consumers are looking to cut their budget.
And when you're buying WMT stock, you're owning a company that has pricing power. That was evident in metrics like the company's gross margin, which expanded by 39 basis points in the quarter.
Walmart announced a 3-for-1 stock split that will go into effect on February 26, 2024. That will give investors a better entry point for initiating or adding to a position.
Another way that WMT stock can help you protect yourself from inflation is via its growing dividend. Walmart is a Dividend King that has increased its dividend for 51 consecutive years.
About Walmart
Walmart Inc engages in the operation of retail, wholesale, other units, and eCommerce worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores under Walmart and Walmart Neighborhood Market brands; membership-only warehouse clubs; ecommerce websites, such as walmart.com.mx, walmart.ca, flipkart.com, PhonePe and other sites; and mobile commerce applications.
Read More - Current Price
- $87.18
- Consensus Rating
- Buy
- Ratings Breakdown
- 29 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $91.51 (5.0% Upside)
#2 - Occidental Petroleum (NYSE:OXY)
If inflation does trend higher, oil prices will be a likely cause. That means oil stocks should be on your radar, and Occidental Petroleum Co. (NYSE: OXY) is one of the top names to consider.
Despite oil prices being range-bound for much of the last 18 months, analysts still expect that crude oil prices will reach or exceed $100 by the end of the year. Geopolitical events are one cause. Another would come from even one interest rate cut, which will spur business spending.
And even if the price of oil doesn't spike as expected, investors in OXY stock benefit from a "Buffett put." The reasoning is that a price of around $58 has served as a buying point for Mr. Buffett.
One reason Buffett is bullish on the company is its strong cash flow, which is accelerating. Occidental has already announced that it plans to use more of that cash flow to reward shareholders in the future, most likely in the form of share repurchases.
Occidental Petroleum stock has become more attractive as a defensive stock since it began increasing its dividend after cutting it sharply in 2020.
About Occidental Petroleum
Occidental Petroleum Corporation, together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, and North Africa. It operates through three segments: Oil and Gas, Chemical, and Midstream and Marketing. The company's Oil and Gas segment explores for, develops, and produces oil and condensate, natural gas liquids (NGLs), and natural gas.
Read More - Current Price
- $50.91
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 12 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $63.65 (25.0% Upside)
#3 - Eli Lilly (NYSE:LLY)
Pharmaceutical stocks are solid defensive stocks at any time. However, the case for Eli Lilly and Company (NYSE: LLY) has an additional tailwind. That comes from the company's flagship products, Mounjaro and Zepbound.
Mounjaro is a groundbreaking treatment for diabetes, and Zepbound is Lilly's entry into the booming weight loss market. Mounjaro sales have already surpassed $2 billion. There's only one quarter of data on Zepbound, but the results are positive so far, with the company generating $175 million in sales.
Individuals may cut back on many things if inflation heats up, but both Mounjaro and Zepbound are drugs that you have to stay on. Eli Lilly was counting on that when it issued positive revenue and earnings guidance for the full year 2024.
LLY stock also pays a dividend. The 0.68% yield is not particularly impressive, but the company has increased its payout for 10 consecutive years, and that payout is currently $5.20 per share.
About Eli Lilly and Company
Eli Lilly and Company discovers, develops, and markets human pharmaceuticals worldwide. The company offers Basaglar, Humalog, Humalog Mix 75/25, Humalog U-100, Humalog U-200, Humalog Mix 50/50, insulin lispro, insulin lispro protamine, insulin lispro mix 75/25, Humulin, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500 for diabetes; Jardiance, Mounjaro, and Trulicity for type 2 diabetes; and Zepbound for obesity.
Read More - Current Price
- $753.41
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 17 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $1,007.94 (33.8% Upside)
#4 - Merck & Co. (NYSE:MRK)
Merck & Co. Inc. (NYSE: MRK) is another inflation-fighting stock in the pharmaceutical sector—the bullish narrative with Merck centers around its oncology portfolio and its flagship drug, Keytruda. Keytruda sales grew 22% in the fourth quarter to $6.6 billion. That was a big reason Merck posted positive earnings in the last quarter when analysts forecasted negative EPS of three cents.
Keytruda is only one drug in the company's oncology portfolio. That portfolio is supposed to grow from $10 billion in 2023 to over $20 billion by 2030.
MRK stock is trading near the top of its 52-week range, but analysts have been bidding the stock higher since its earnings report in early February. The stock is also trading at a more attractive forward price-to-earnings ratio of 15x, which is far lower than the 59.6x forward earnings investors are paying for LLY stock.
About Merck & Co., Inc.
Merck & Co, Inc operates as a healthcare company worldwide. It operates through two segments, Pharmaceutical and Animal Health. The Pharmaceutical segment offers human health pharmaceutical products in the areas of oncology, hospital acute care, immunology, neuroscience, virology, cardiovascular, and diabetes under the Keytruda, Bridion, Adempas, Lagevrio, Belsomra, Simponi, and Januvia brands, as well as vaccine products consisting of preventive pediatric, adolescent, and adult vaccines under the Gardasil/Gardasil 9, ProQuad, M-M-R II, Varivax, RotaTeq, Live Oral, Vaxneuvance, Pneumovax 23, and Vaqta names.
Read More - Current Price
- $97.43
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 12 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $130.86 (34.3% Upside)
#5 - Mondelez International (NASDAQ:MDLZ)
Next up on this list of inflation-resistant stocks is Mondelez International Inc. (NASDAQ: MDLZ). This is more than an "everybody loves chocolate" story, although Mondelez is the parent company of both Cadbury and Toblerone.
It's more the opposite. One of the reasons investors should be bullish on Mondelez is that its portfolio of products is less dependent on cocoa prices as, say, The Hershey Company (NYSE: HSY), which trades for a slightly better valuation than MDLZ stock.
The company's portfolio includes some of the best-loved consumer names, such as Oreo's, Ritz crackers and CLIF bars. In a recent interview with Barron's, Mondelez's CEO said the company's go-to-market strategy is working well, with one of the reasons being that having sought-after brands gives Mondelez pricing power.
The Mondelez analyst ratings on MarketBeat are projecting 10% stock price growth even without a rate increase.
About Mondelez International
Mondelez International, Inc, through its subsidiaries, manufactures, markets, and sells snack food and beverage products in the Latin America, North America, Asia, the Middle East, Africa, and Europe. It provides biscuits and baked snacks, including cookies, crackers, salted snacks, snack bars, and cakes and pastries; chocolates; and gums and candies, as well as various cheese and grocery, and powdered beverage products.
Read More - Current Price
- $64.42
- Consensus Rating
- Buy
- Ratings Breakdown
- 16 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $80.31 (24.7% Upside)
#6 - McCormick (NYSE:MKC)
Food is one area where inflation tends to be the most sticky. However, McCormick & Company Inc. (NYSE: MKC) remains an attractive stock to consider if inflation moves higher.
The reason is that "food" doesn't just mean food you prepare at home. Since 2022, inflation-weary consumers have been in a tug-of-war between eating out versus eating at home. At first, it didn't matter as consumers were just ready to get back to their pre-pandemic routine. But restaurants have definitely raised their prices, and many consumers are swiftly pivoting back to a home-cooked meal.
McCormick benefited from this trend in 2020 as consumers had to restock their neglected spice drawers. And that doesn't even count the company's recent acquisitions, which have brought names like Frank's Red Hot and Cholula under its umbrella.
MKC stock trades at 23x forward earnings and is a Dividend Aristocrat, having increased its dividend for 37 consecutive years. That dividend currently has a yield of 2.5%.
About McCormick & Company, Incorporated
McCormick & Company, Incorporated manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates in two segments, Consumer and Flavor Solutions. The Consumer segment offers spices, herbs, and seasonings, as well as condiments and sauces, and desserts.
Read More - Current Price
- $77.13
- Consensus Rating
- Hold
- Ratings Breakdown
- 3 Buy Ratings, 5 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $79.57 (3.2% Upside)
#7 - Kimberly-Clark (NYSE:KMB)
The last, but certainly not least, the inflation-busting stock is consumer staples giant Kimberly-Clark Co. (NYSE: KMB). An oft-mentioned comment that bears repeating is that you probably have several Kimberly-Clark products in your home at any given time. The brand's portfolio is that broad-reaching.
And that portfolio comes with pricing power. Despite its higher prices, Kimberly-Clark did post single-digit year-over-year revenue and EPS growth. The growth was particularly strong in its K-C Professional segment.
The company also noted that its gross margin has returned to pre-pandemic levels, free cash flow increased significantly, and it managed to pay down significant debt in 2023.
Analysts project approximately 7% upside for KMB stock in 2024. However, investors are also buying a Dividend King that currently has a yield of 4.03%. Plus, the stock trades at around 17x forward earnings, which is a slight discount to the Consumer Staples sector average of 19.4x.
About Kimberly-Clark
Kimberly-Clark Corporation, together with its subsidiaries, manufactures and markets personal care and consumer tissue products in the United States. It operates through three segments: Personal Care, Consumer Tissue, and K-C Professional. The company's Personal Care segment offers disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, reusable underwear, and other related products under the Huggies, Pull-Ups, Little Swimmers, GoodNites, DryNites, Sweety, Kotex, U by Kotex, Intimus, Thinx, Poise, Depend, Plenitud, Softex, and other brand names.
Read More - Current Price
- $136.37
- Consensus Rating
- Hold
- Ratings Breakdown
- 6 Buy Ratings, 7 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $149.93 (9.9% Upside)
With many investors piling money into artificial intelligence (AI) stocks, buying defensive stocks may seem like you're missing an opportunity. We're not advocating you ignore the growth possibilities that may come from AI.
But if inflation continues to increase, interest rates will likely stay higher for longer. In this case, longer could mean until after the November election. The recent notes from the Federal Reserve's January meeting show that many voting members are concerned about the Fed lowering rates too soon.
And if the Fed doesn't raise rates in May, some analysts believe it will take a policy of doing nothing rather than be seen as making a rate cut that could steer the election. The fact is that nobody knows for sure. That's why it could make sense for you to have some protection in your portfolio. And we've made a brief case for why these defensive stocks are likely to rise even if inflation continues to spike.
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