Google the word “greedflation,” and you get more than 1.1 million results. Greedy stocks have become a favorite topic for investors.
In Canada, where I live, the citizens are furious with the large grocery store chains — they’ve been growing their profits over the past few years, including before the pandemic, due to a lack of competition — who’ve been raising food prices seemingly at will.
Here in the U.S., Accountable US, a non-profit highlighting corporations’ and policymakers’ conflicts of interest, exposed S&P 500 companies that have raised their prices, generating higher profits, while inflation returns to historical levels.
“After an unprecedented 10 interest rate hikes in a row, it’s clear the corporate profiteering epidemic will persist no matter how many times the Fed doubles down,” stated Liz Zelnick, the non-profits Director of Economic Security and Corporate Power.
“Higher interest rates haven’t stopped S&P companies, especially in the big food industry, from inflating consumer prices despite reporting billions in extra net earnings and over a trillion dollars in giveaways to wealthy investors.”
Not surprisingly, corporate America is fighting these unflattering comments. Of course, when you’re a special interest group like these companies, you have plenty of cash to carry out a positive public relations spin.
However, if you’re an investor, and don’t care about corporate America’s greed, here are three stocks that continue to benefit from inflation.
Kimberly Clark (KMB)
The most ironic part of the report from Accountable US is that the five names it mentions as being greedy have generated average returns of -5.9% in 2023, with only one in positive territory.
While your first instinct might be to suggest karma is somehow involved, the reality is that the stock market tends to look six months out, so any of the profit gains made in 2022 would have been reflected earlier in 2023. All five, including Kimberly Clark (NYSE:KMB), have all lost a big chunk of their gains since May. This makes it one of those greedy stocks.
The Accountable US report highlighted that the maker of toilet paper (Cottonelle), facial tissues (Kleenex), adult diapers (Depend), baby diapers (Huggies), and feminine care (Kotex) implemented significant pricing actions in 2022, enabling it to grow its net income by more than 6%, to nearly $2 billion. As a result of its profit growth, it returned $1.7 billion to shareholders through share repurchases and dividends.
The markets that KMB operates are not high-growth. Just look at the first quarter results. All three of its business segments experienced volume declines in Q1 2023. However, because of price increases ranging from 4% to 26%, it was able to eke out an overall 2% sales gain.
As a result of these price increases, the company raised its adjusted earnings per share guidance for 2023 to between 6% and 10%.
PepsiCo (PEP)
I must admit that I’m a fan of PepsiCo (NASDAQ:PEP) precisely because of its pricing power. As a consumer, I hate it, but who better to bet on than companies whose products you routinely use?
Accountable US said this about the company in its report:
“PepsiCo, whose Chairman and CEO recently admitted that the company might ‘have to take additional pricing,’ saw its net income increase by 16.9% [2022] to nearly $9 billion while spending over $7.6 billion in stock buybacks and dividends, with stock buybacks increasing 1,313% from 2021.”
The key to paying out dividends and repurchasing shares as rewards to shareholders is to generate significant free cash flow. The best companies convert a large chunk of their income to free cash flow.
In the trailing 12 months ended March 31, PepsiCo generated a free cash flow of $5.33 billion [cash flow], 81% of its $6.58 billion [income statement] in net income.
The two go hand in hand. PepsiCo is one of the best at converting income to free cash flow. Pricing power has something to do with it.
General Mills (GIS)
General Mills (NYSE:GIS) continues executing its Accelerate strategy to generate sustainable revenue and profit growth, which will enable it to deliver top-tier shareholder returns over the long haul.
“The strategy focuses on four pillars to create competitive advantages and win: boldly building brands, relentlessly innovating, unleashing scale, and standing for good,” the company’s Q4 2023 press release stated.
In fiscal 2023 (May year-end), its sales rose 6% from a year ago to $20.1 billion. Its organic sales rose 10% in the past year. Again, like Kimberly Clark, volumes were down in 2022, but prices were way up, ranging from 12% to 16%. The word “price” is mentioned 25 times in its Q4 2023 press release.
Thanks to these price increases, General Mills exceeded $20 billion in annual sales for the time in its history.
On the bottom line, its operating profit in 2023 was flat to 2022, at $889.4 million. However, while its adjusted gross margin was 34.2%, 120 basis points higher than in 2022, its selling, general, and administrative expenses were 11% higher, largely due to higher advertising and employee costs. Otherwise, it would have grown its operating profits in 2023 thanks to higher prices.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
