Inflation has been reducing purchasing power for consumers over the past two years. So, to counterattack this effect, consider some inflation-hedging stocks. These stocks do well when inflation increases. In June 2022, U.S. inflation hit a four-decade peak reaching a record 9.1%. Budgets were increasing for consumers and companies’ margins were getting squeezed. However, some leading inflation-resistant stocks performed well during the period.
The Horizon Kinetics Inflation Beneficiaries ETF (NYSEARCA:INFL), which holds some inflation-hedging stocks, handily outperformed the S&P 500 Index in 2022. It contains some stocks that benefit as prices of real assets rise. These companies can benefit from rising prices, pass on higher costs or have a low-cost base that enables them to be immune against inflationary pressures. Here are three holdings from the ETF that will hedge your portfolio against inflation.
Texas Pacific Land Corporation (TPL)
As a royalty energy company that owns oil-rich land, Texas Pacific Land Corporation (TPL) is a play on rising oil prices. Its crown jewel is its land ownership rights on the Delaware Basin in Texas, which accounts for 25% of total horizontal rigs in the U.S.
The Texas-based company earns royalties on the oil and gas production made by companies that lease its land. Texas Pacific Land Corporation doesn’t have to replace its reserves as a royalty company. It is a pass-through entity with its lessees making capital investments. Since it doesn’t have to invest in capital expenditure and employees, it has higher profitability than oil exploration and production companies. The minimal operating and capital expenditures also lead to higher cash flows. And when oil prices increase, those increases flow directly to the bottom line.
Due to these advantages, TPL stock has delivered outstanding fundamentals. Between 2016 and 2022, adjusted EBITDA grew at a 38% compounded annual growth rate. As a result, it has handily outperformed the S&P Oil & Gas E&P Index. TPL stock presents significant upside. According to their investor presentation in February, only 14% of royalty acreage is developed. As more of its land gets developed, its royalty income will grow.
Archer Daniels Midland (ADM)
Archer Daniels Midland (NYSE:ADM) participates in the global agricultural supply chain and processes various food ingredients. It’s at the heart of what you eat and drink. It’s one of the inflation-hedging stocks that earns a margin on rising food commodity prices.
The company doesn’t engage in farming but sources various agricultural commodities. Its agriculture services and oilseeds division originates, transports and stores various agricultural raw materials. It processes oilseeds such as soybeans into vegetable oils and protein meals. The Carbohydrate Solutions segment processes corn and wheat products into different food and beverage ingredients, including corn and wheat starches, syrup, sweeteners, glucose, wheat flour and dextrose.
ADM is positioned for growth due to its exposure to food security, health and well-being, and sustainability themes. After all, a growing population needs more food and healthy ingredients. The company benefits from tight supply and demand in agricultural commodities since it charges higher prices. This agricultural commodities giant has been feeding the world for decades and will continue to do so. And the resiliency of its food processing business model has been proven over the years. The company has paid a dividend for 90 consecutive years and raised it for 50 straight years.
Franco Nevada (FNV)
In an inflationary world, hard assets like gold and silver protect against price increases. That’s why Franco Nevada (NYSE:FNV) is among the inflation-hedging stocks to consider. This Canadian-based company pioneered the royalties and streaming model in 1986, concentrating on gold and silver mines. It doesn’t develop mines. Instead, it pays an upfront cash payment to the company developing the mine. In turn, it obtains the right to receive a portion of future production or revenues. In streaming contracts, it receives streamed physical volumes of specific commodities, whereas in royalty contracts it earns a share of the revenue generated.
This strategy allows the company to avoid the substantial capital expenditures, political upheavals and other obstacles miners face in developing resources for production. Additionally, rather than spending enormous upfront costs on one project, it can diversify its investments. Due to this strategy, the company has ended up with a portfolio of 427 portfolio assets. It earns royalties from mining properties developed and run by top producers such as Barrick Gold (NYSE:GOLD), Vale S.A.(NYSE:VALE), Teck Resources (NYSE:TECK) and Sibanye Stillwater (NYSE:SBSW).
As of June 2023, 116 of its 427 properties were in production. The rest were in advanced development or the exploration phase. Regarding commodity diversification, gold, silver and oil royalties were 62%, 11% and 10% of total revenues, respectively.
The royalty model generates enormous profits for Franco Nevada. For instance, the company achieved an 84% adjusted EBITDA margin in 2022. The company then invests these profits in new assets. Additionally, it pays out a dividend that has increased for 16 consecutive years. If inflation reaccelerates, Franco Nevada is one of the top inflation-hedging stocks in an inflationary environment.
On the date of publication, Charles Munyi did not hold (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.
