Loose monetary policy, stimulus checks and a host of other measures helped the US through the 2020 lockdown. However, this “free money” came at a price, which was the highest rate of inflation. high seen since 1981. According to Trading Economics, annual inflation accelerated to 8.6% in May 2022, well above the Federal Reserve’s 2% target.
To combat this, the central bank is raising its federal funds rate, which has an impact on real interest rates. Higher interest rates increase the cost of borrowing for households and can therefore affect household income. Although high inflation squeezes both consumers and businesses with higher input and utility costs, it is manageable when we have a “high growth” scenario. However, if gross domestic product growth is negative or low and inflation is high, this causes “stagflation”.
According to a recent Wells Fargo study (WFC, Financial), the bank’s investment institute recorded a contraction in GDP in the second quarter. So, with high inflation rates, we are now in a stagflation scenario. Nomura analysts also forecast a “shallow but long recession” starting in the fourth quarter of 2022. During historical periods of inflation such as the 1970s, real estate and commodities have performed well. Firms with “pricing power” can also do well.
Let’s dive into my top two actions to fight inflation.
Transfer of energy LP (HEY, Financial) is the backbone of the American oil industry. It owns more than 120,000 miles of pipelines and energy infrastructure in 41 states and enables the transportation of oil and gas. According to the company’s website, at least a third of all crude oil and natural gas in the United States is transported through its pipelines.
Energy security is a growing concern for nations around the world and with oil prices approaching $100 a barrel, companies involved in the industry are seeing increased profits. Whether we have a recession, stagflation or even a war, we will always need energy for our homes and factories. The vast scale of energy transfer gives it a competitive advantage, as building a competing pipeline would be extremely expensive, take many years, and in many cases even impossible due to regulations.
In Q4 2021, Energy Transfer merged with Enable Midstream Partners to further expand its business. In the first quarter of 2022, the company entered into an impressive partnership with China Gas to supply the energy giant with liquefied natural gas. The 25-year contract effectively guarantees revenue for Energy Transfer for decades to come.
Ken Fisher (Businesses, Portfolio) and
First Pacific Councilors (Trades, Portfolio) were buying shares in the first quarter of 2022 at an average price of $9, which is close to where the stock trades today.
Energy Transfer reported net income attributable to partners of $1.3 billion, up 30% from the prior quarter but down from March 2021. The year-over-year decline was explained by higher than normal revenues in 2021 due to the winter storm. Uri, so finances are strong.
Adjusted Ebitda was $3.34 billion for the first quarter, which was lower than the $5.04 billion reported in the prior year quarter, again due to abnormally high profits from the storm. Management showed confidence and increased its Full Year 2022 Adjusted Ebitda guidance to $12.2 billion to $12.6 billion from $11.8 billion at 12, $2 billion previously reported. Free cash flow per share was 52 cents, compared to 30 cents in the prior quarter. Distributable cash flow was $2 billion.
Energy Transfer pays out a huge forward dividend yield of around 8% with a payout ratio of 64%. Management announced an expected increase in capital spending to a range of $1.8 billion to $2.1 billion from the previously announced $1.6 billion to $1.9 billion. In terms of valuation, the GF value line indicates a value of $10 per share, so the stock is valued at its fair value at the time of writing, based on historical ratios, past financial performance and projections of future profits.
AmericanTower Corp. (AMT, Financial) is a real estate investment trust that owns telecommunications assets, such as network towers and base stations. It currently has more than 200,000 telecommunications sites worldwide, which it builds and leases to major mobile operators such as Verizon (VZ, financial) and AT&T(J, Financial). It is ranked 410 on the Fortune 500 and is truly an industry mammoth.
Mobile data has become as valuable as electricity for many people. In North America, the average monthly mobile data usage per phone was 15 gigabytes in 2021. According to Ericsson, this is expected to increase 3.4 times to 52 GB by 2027. This is expected to be due to the increase from 5G network coverage, to video-based augmented reality applications and much more. 5G subscription penetration is expected to cover 90% of North America by 2027.
American Tower is the backbone of the telecommunications industry and continues to expand. In Q1 2022, the company completed construction of 1,450 new sites with first-day average yields of around 14%, which is fantastic.
American Tower offers more security to investors with a series of master lease agreements with carriers, which can last up to 15 years. It means recession or not, those leases and agreements are in place. The largest hedge fund in the world,
Ray Dalio Bridgewater Associates of (Trades, Portfolio) and growth equity investment firm
Baillie Gifford (Trades, Portfolio) were buying shares in the first quarter of 2021 at an average price of $243 each. This is close to where the stock is trading today after the recent pullback.
American Tower had a strong first quarter of 2022, with real estate revenue jumping 22% from $2.1 billion to $2.6 billion year-over-year. Organic tenant billing growth jumped 18.8% in Europe and 7.4% internationally. The US market took a hit after the T-Mobile merger (TMUS, financial) and Sprint.
Adjusted EBITDA increased 12.8% from $1.4 billion to $1.6 billion in the first quarter of 2022. Adjusted funds from operations, a common measure for analysis REITs, rose 6.1% to $1.2 billion.
American Tower even raised its real estate revenue outlook for fiscal 2022. Management expects $10.4 billion, up 14% from 2021.
The REIT’s dividend yield is 2.24%. In terms of valuation, the GF value line indicates that the fair value is around $295 per share. The stock is currently trading near $255 and is therefore slightly undervalued.
Investing during a recession or stagflation can be a challenge. Ideally, it is better to invest in companies with inflation-resistant assets such as oil or real estate in addition to those with stable cash flow, high dividends and a competitive advantage. In this case, these two stocks offer diversification, value and income.