The Bank of England released a rather worrying forecast last week. The Bank said: “We expect [inflation] to reach around 8% this spring. We think it could go even higher later this year.”
This got me thinking about which companies I should add to my portfolio that offer some inflation protection. Let’s take a look at two stocks I’d buy.
Cash flow linked to inflation
The first company I like the look of is Supermarket Income REIT (LSE: SUPR). It’s a real estate investment trust (REIT) that manages high-quality property for leading grocery brands. It says it provides secure, inflation-protected income. Sounds promising, but I need to dig a bit deeper to see if I should buy the shares.
Firstly, 85% of the company’s rental income is directly linked to inflation. This means that if inflation rises (potentially by that scary 8% forecast), then Supermarket Income’s rent should hopefully rise by at least this same amount, too. That will really help to protect my portfolio against rising inflation.
One further positive is that the grocery sector can generally pass on costs to its customers. It’ll mean the tenants that rent Supermarket Income’s properties should be able to keep paying rents at higher rates if inflation does keep rising.
What’s more, Supermarket Income has been able to increase its dividend in line with inflation each year. This gives me confidence I’d be buying some inflation-proofed cash flows for my portfolio.
There are always risks to consider with any investment though. REITs can suffer from low occupancy rates, which will mean rents would fall. Supermarket Income also has near £500m of debt on the balance sheet. I have to be confident that the management team is acquiring attractive properties with the debt so the cash keeps rolling in.
I still like the inflation protection this stock will bring, so I’d add it to my portfolio today.
A company with pricing power
Another strategy I like to use when inflation rises is to buy companies with pricing power. This is when a company can charge more for its products or services without losing market share. Generally, businesses with an economic moat – to use a Warren Buffett phrase – can do this.
The company I’d buy that I think has pricing power is Auto Trader (LSE: AUTO). It’s the UK’s leading online marketplace for both used and new cars. Because it has the most buyers on its platform, car retailers and private sellers all want to list their cars for sale on the website. As such, there’s a good chance that Auto Trader will be able to raise its prices in line with inflation without losing its customers.
I class it as a quality company too. It achieves sky-high operating margins each year, and generates excellent returns on its capital base.
I’ve noticed some competition for Auto Trader recently, so it might not be all plain sailing going forward. This might mean that Auto Trader may have to fight harder to keep its leading position in the UK’s automotive marketplace. But although this is certainly a risk to consider, I’d still add to my position.