The Federal Reserve has said it believes the current spike in prices is due to the unusual situation caused by the pandemic and subsequent recovery. Certainly there are reasons to believe that special circumstances related to supply chain constraints, low inventory levels, and the sharp rebound in consumer demand should normalize.
But many people don't want to take a chance on losing hefty paper gains, and want to shift at least some investments as a hedge in case inflation turns out to be more than transitory. These three stocks in the industrial sector have built-in protections from inflation, but also give investors a good reason to own them beyond that.
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Still a worthy tollbooth
For years, income investors declared Kinder Morgan (KMI -0.53%) a "tollbooth" investment thanks to the recurring income from its vast network of pipelines that include take-or-pay contracts or set-fee payments. The company passed along to shareholders the reliable income it collected from delivering fuel through its pipelines, regardless of the price of commodities like oil or natural gas.
But Kinder Morgan miscalculated with its growth strategy, incurring too much debt along the way. By 2015, long-term debt had grown to more than $40 billion, and the company slashed its dividend by 75% beginning in 2016. The stock crashed as income investors who owned Kinder Morgan sold it in droves.
But the company has spent the last few years lowering its debt, while continuing to grow operations funded by its cash generation. It also more than doubled the dividend from 2016 levels along the way, and yields a very respectable 5.6% at the recent share price. After its most recent dividend increase in April 2021, chairman Richard Kinder issued a statement saying, "... our assets continued to provide strong cash flow as we remain guided by a sound corporate philosophy: fund our capital needs internally, maintain a healthy balance sheet, and return excess cash to our shareholders through dividend increases and/or share repurchases."
Total debt is at its lowest in over five years. The company predicts distributable cash flow in 2021 of between $5.1 billion and $5.3 billion. It holds $1.3 billion in cash, and has almost its full $4 billion credit facility still available. Investors today should be able to count on steady and growing dividend income, making this energy pipeline operator a good inflation hedge.
Rising prices, rising profits
Nucor (NUE -0.28%), North America's largest steelmaker and steel products company, just reported record quarterly profits in 2021's first quarter. The company is enjoying the benefits of higher steel prices, and already has predicted the second quarter will bring another new record. Steel price futures as measured by hot-rolled coil steel continue to sit at record highs of about $1,640 per ton. That's about 225% higher than just one year ago.
While pricing will eventually drop, either from competitive imports or users looking for alternative materials, steel companies like Nucor are quoting deliveries out about three months due to high demand. This gives investors visibility well beyond the current fiscal quarter.
An investment in Nucor isn't just about the price of the commodity, either. Nucor has invested about $4 billion of capital back into its business over the last several years, and these projects are now beginning to show returns as they move beyond start-up status. And the company just spent another $1 billion in cash to expand its business downstream with the acquisition of a leading producer of insulated building panels. This investment will add value as a user of the company's steel, with areas of growth including data centers, fulfillment warehouses, and energy-saving construction.
Even though the stock has doubled already in 2021, profits should conservatively be greater than $3.5 billion for the year, given current pricing and backlogs. So although the business -- and stock price -- will continue to be cyclical, those looking for a long-term holding that can be an inflation hedge could still do well to buy at recent prices. The company also pays a reliable dividend that yields 1.5%. And that should continue to grow since Nucor is a Dividend Aristocrat that has raised its base payout for 48 straight years.
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A commodity in high demand
For leading copper producer Freeport-McMoRan (FCX 0.23%), the price of the commodity will be the main factor in the performance of its stock.
Copper is in a favorable business environment, with supplies that might not be able to keep pace with strongly growing demand. Over the five years through the middle of 2020, copper prices bounced between $2.10 and $3.30 per ounce. But they have since soared to over $4.50, a level last seen during the recovery from the Great Recession in 2010 and 2011.
Data by YCharts.
Right now, the demand for copper is soaring due to the snapback economic recovery from the pandemic. The industrial, construction, and energy sectors largely drive the demand for the crucial metal. Freeport-McMoRan has already taken advantage of the favorable pricing environment by lowering its net debt in just the past year from $8.5 billion to $5.2 billion as of the first quarter, which ended March 31.
But this doesn't seem to be just part of the typical cycle copper has historically followed. The metal has a crucial role in energy, and the movement toward renewable energy will rely heavily on copper. Electric vehicles and other renewable energy technologies use at least four times more copper than fossil fuel technologies, according to the International Copper Association. As these sectors continue to grow, so will Freeport.
That doesn't mean copper, and Freeport, won't see business cycles along the way. A recession would temporarily lower the output from construction and industrial companies, and copper demand would thus dip. But for those looking for a hedge against inflation, copper looks to have a sustainably higher price than at any time in the past decade, which will benefit investors in Freeport-McMoRan.
