Inflation robs people of the spending power of their cash. Over the past 30 years, it has just about halved the value of a dollar, and that has been pretty modest. In the 30 years between 1970 and 2000, it knocked out more than 75% of the currency's purchasing value. In other words, by the end of that time period, it took over $1,000 to buy what $250 could have bought previously.
It's because of that risk that even retirees who think they have “enough” to cover their costs for the rest of their lives own stocks. With a decent total rate of return, stock investors have the possibility of seeing their purchasing power hold up over time even after considering inflation and the taxes on their investments. If you're worried about inflation and what it can do to your purchasing power, these three stocks may be able to help you fight its effects over time.
A healthcare titan on the forefront of improving operational efficiency
Healthcare is an area of the economy where costs have generally risen faster than overall inflation over time. That pressure creates an opportunity for Cardinal Health (NYSE: CAH) to step in to attempt to keep costs from spiraling too far out of control. From the business end to the supply chain to patient compliance, Cardinal Health helps providers find ways to keep the total cost of healthcare in check.
The company reaches around 90% of U.S.-based hospitals, which gives it an incredible coverage of its target market. It also means Cardinal Health has the scale it takes to make even small changes per facility add up to a big impact overall for the company.
Analysts are expecting Cardinal Health to be able to improve its earnings by about 7.6% annually over the next five years. If that comes to pass, it should go a long way toward helping its investors beat back the ravages of inflation.
A leading transportation company that owns its own infrastructure
Pretty much by definition, inflation means that things cost more in dollar terms than they did before. If there's an upside to that, it's that companies with large already-paid-for or fixed-cost infrastructures benefit from the operational leverage that comes from rising revenue on top of fixed costs.
That's an environment where Union Pacific (NYSE: UNP) can shine. A railroad with around 32,000 miles of track, Union Pacific will benefit from that large existing infrastructure. It will also benefit from the fact that as the merchandise carried on its trains gets priced higher, its own price to transport those products will consume less of that revenue. That should make it easier for it to pass through pricing of its own, which is how it could benefit from inflationary pressures.
Analysts are expecting the railroad to be able to increase its earnings by a very solid 12.9% on an annualized basis over the next five years. Even if it doesn't quite live up to that expectation, getting close still provides a growth rate poised to be a great inflation fighter for investors.
You have to eat, don't you?
When economists talk about inflation, they often quote two different numbers: an “all in” inflation number and a “core” inflation number that excludes food and energy. The reason they exclude food and energy is that those numbers tend to be more volatile than the overall inflation numbers, meaning they move around more. It also means that when inflation hits, it tends to hit those food and energy expenses, too, and it may show up there faster than in the overall economic numbers.
People have to eat, after all, and if they have to make choices between food and less important parts of their lives, they'll often choose making sure they have food on the table. That's a key reason why inflation tends to hit food prices faster than elsewhere.
Although rising food prices are a problem for consumers, they represent more revenue for food producers and distributors. As the world's leading food distributor, Sysco (NYSE: SYY) is poised to benefit from seeing higher prices in the food and related products it supplies to its customers. Indeed, in an era of high food price inflation levels worldwide, Sysco is expected to be able to increase its earnings by nearly 23% on an annualized basis over the next five years.
Of course, a big part of that expected growth has to do with Sysco standing to benefit as restaurants reopen as the COVID-19 pandemic eases. Still, if inflation rears its ugly head, there are likely worse investments to be in than one responsible for distributing something as critical as food.
What's more basic than health, transportation, and food?
A key reason these three companies are poised to do well in an inflationary environment is that they focus on the very basic needs of health, food, and transportation. If people's salaries don't keep up with the overall inflation they're feeling, they're likely to cut back on the extras and focus on those core items.
If you're trying to figure out what to invest in when inflation rears its ugly head, you could do far worse than to focus on the fundamentals. To the extent that Cardinal Health, Union Pacific, and Sysco are able to continue operating and passing on higher costs to consumers, they should be well positioned to help their investors fight that inflation.
As an individual, you have little control over the inflation you face. By owning companies that may be able to grow fast enough to keep up with it, however, you can give yourself a fighting chance of protecting your purchasing power. When it comes to facing down the ravages of inflation, that's not a bad place to be.
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Chuck Saletta owns shares of Union Pacific and has the following options: long January 2023 $55.0 calls on Cardinal Health, short January 2023 $55.0 puts on Cardinal Health, short June 2021 $50.0 puts on Cardinal Health, and short June 2021 $60.0 calls on Cardinal Health. The Motley Fool recommends Union Pacific and recommends the following options: long January 2023 $50.0 calls on Sysco and short May 2021 $85.0 calls on Sysco. The Motley Fool has a disclosure policy.