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4 Value Stocks That'll Help You Trounce Inflation

By Sean Williams – Aug 11, 2021 at 6:06AM

Key Points

  • A key measure of inflation hit a more than 12-year high in June.
  • Putting money to work in value stocks, which often pay a dividend, is a smart way to counteract rising prices.

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One of the best ways to fight back against inflation is to put your cash to work in time-tested companies.

Your eyes aren't playing tricks on you. The price you're paying for commonly purchased goods and services is rising.

In a growing economy, it's perfectly normal for the price of goods and services to climb at a steady pace. But what we've witnessed recently is far from steady. In June, the Consumer Price Index for All Urban Consumers rose by 5.4% from the prior-year period. Minus energy and food, the Core Consumer Price Index jumped 4.5%.

Respectively, these are the highest year-over-year price increases since August 2008 and November 1991. In other words, the buying power of cash sitting on the sidelines is being eroded faster than it has been in over a decade.

However, the good news is that the stock market provides a solution. Buying value stocks would allow investors to take advantage of potential long-term share price appreciation, as well as collect a dividend payout, in many instances. After all, the vast majority of value stocks are profitable and have time-tested operating models.

The following four value stocks would be perfect to help investors trounce inflation.

A person counting one hundred dollar bills in their hands.

Image source: Getty Images.

Johnson & Johnson

Healthcare conglomerate Johnson & Johnson (JNJ -0.70%) has a lot going for it that would appeal to investors who want to outpace inflation. To begin with, J&J is one of only two publicly traded companies that holds a highly coveted AAA credit rating from Standard & Poor's. That's a higher credit than the U.S. government, and it implies that S&P has the utmost confidence in J&J's ability to make good on its outstanding debts.

What really makes Johnson & Johnson tick is the company's three operating segments, each of which is an important piece of the puzzle. For instance, its consumer healthcare products segment is slow-growing, but it has strong pricing power and generates predictable cash flow. There's also the medical device division, which has grown slowly of late, but is perfectly set up to take advantage of an aging U.S. and global population.

Lastly, pharmaceuticals are responsible for the bulk of J&J's margins and growth in the near term, although brand-name drugs have a finite period of sales exclusivity. These operating segments have worked together flawlessly to consistently push Johnson & Johnson's adjusted operating earnings higher year after year.

We're well past the point where J&J is going to floor Wall Street with its growth prospects. However, Johnson & Johnson has the potential to deliver high single-digit earnings growth and maintain its 59-year streak of base annual dividend increases, all while being valued at roughly 16 times Wall Street's forward-year profit estimate. Its 2.4% yield and share price appreciation potential should be more than enough to put inflation in its place.

A small pyramid of tobacco cigarettes set atop a thin bed of dried tobacco.

Image source: Getty Images.

Philip Morris International

If you're interested in a company where the dividend payout will do more of the heavy lifting, tobacco stock Philip Morris International (PM 0.16%) is a stock that can smoke inflation. Philip Morris ended this past week with a yield nearing 5%.

It's no secret that a number of developed markets around the world are waging a war against tobacco and the negative effects associated with its use. Thankfully, Philip Morris' geographic reach is a major advantage. With a presence in more than 180 countries worldwide, Philip Morris is able to offset volume weakness in markets where regulation is picking up with emerging markets where tobacco is still viewed as a luxury by a burgeoning middle class. Between its geographic diversity and the exceptionally strong pricing power associated with tobacco cigarettes, Philip Morris has had little issue growing its sales.

This is a company that's looking to the future, as well. Sales of the IQOS heated tobacco system have soared, with heated tobacco unit shipment volume jumping 30% in the first half of 2021, compared to the previous year. Innovation on the smokeless tobacco front will further help Philip Morris offset any tobacco cigarette volume weakness it's contending with in developed markets.

Tobacco isn't the growth story it once was, but that hasn't stopped Philip Morris from continuing to deliver for its shareholders.

A smiling pharmacist holding a prescription bottle while consulting with a customer.

Image source: Getty Images.

Walgreens Boots Alliance

Johnson & Johnson isn't the only value-focused healthcare stock that can help investors navigate their way through an environment of rapidly rising prices. Pharmacy chain Walgreens Boots Alliance (WBA 0.66%) and its market-topping 4.1% dividend yield can help investors crush inflation.

Walgreens is well into a multiyear turnaround plan that's designed to improve its operating efficiency and jump-start its organic growth. By the end of fiscal 2022, the company anticipates having reduced its operating expenses by north of $2 billion.

Yet, in spite of these cost cuts, Walgreens has spent aggressively to digitize its systems and promote direct-to-consumer sales. Although online retail makes up only a small percentage of its total sales, it's a segment that offers sustainable double-digit growth for the foreseeable future.

Arguably even more exciting for Walgreens is the partnership it announced with VillageMD in July 2020. This duo plans to open as many as 700 full-service clinics co-located in Walgreens' stores in over 30 U.S. markets. Whereas most co-located clinics can only handle so much as a sniffle, this full-service partnership, complete with onsite physicians, could draw repeat patients, improve brand loyalty, and drive business to Walgreens' higher-margin pharmacy segment.

At less than 10 times forward earnings, Walgreens is just what the doctor ordered for investors concerned about inflation.

Two businesspeople shaking hands, with one holding a miniature house in their left hand.

Image source: Getty Images.

AGNC Investment Corp.

A fourth value stock that'll help you run circles around inflation is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 0.73%). AGNC has a mouthwatering 9% yield and can currently be scooped up by investors for almost 9% below its book value.

The mortgage REIT operating model is pretty straightforward. Companies like AGNC are aiming to borrow money at lower short-term rates to purchase assets, such as mortgage-backed securities, that possess higher long-term yields. The difference between its yield on assets and its borrowing rate is known as the net interest margin.

Generally, mortgage REITs do their best when the yield curve is steepening during the early stages of an economic recovery, which is where we are now. With the nation's central bank telegraphing its monetary moves, AGNC is set up perfectly to generate more income and expand its book value.

AGNC Investment's asset breakdown is also paramount to its success. Nearly all of the securities in its asset portfolio are agency backed. This means they're protected by the federal government in the event of a default. This protection is what allows AGNC to utilize leverage to increase its profit potential.

Averaging a double-digit yield for 11 of the past 12 years, AGNC Investment is a good bet to help investors overcome rising prices.

Sean Williams owns shares of Walgreens Boots Alliance. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$176.09 (-0.70%) $-1.24
Walgreens Boots Alliance Stock Quote
Walgreens Boots Alliance
WBA
$41.08 (0.66%) $0.27
Philip Morris International Stock Quote
Philip Morris International
PM
$97.79 (0.16%) $0.16
AGNC Investment Corp. Stock Quote
AGNC Investment Corp.
AGNC
$9.71 (0.73%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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