Inflation may have moderated since growing uncontrollably just a few years ago, as COVID lockdowns lifted, paving the way for skyrocketing prices of pretty much everything. While core inflation rates seem to be less of a problem these days, as they settle in a 3% range, there’s concern that the Federal Reserve’s new rate-cutting cycle could cause inflation to pick up over the shorter term, perhaps at a rate that brings considerable pain to consumers.
Of course, artificial intelligence (AI) stands out as a deflationary force, given the cost savings of automation and AI-driven optimization. But, at this juncture, it’s unclear when AI spending will translate into such big profitability drivers for companies. One has to imagine we’re still in the earlier innings and that firms will need to keep spending far more than they’ll get back in near-term profitability gains.
In any case, don’t count on AI’s deflationary potential to save the day anytime soon, especially if profitability gains for everyday companies lie farther out into the future. In the meantime, it may be a good idea to load up the shopping cart with cheap dividend stocks that can help investors stay ahead of the rising tide of inflation.
When it comes to businesses that can fare well in a climate where inflation hovers in the 3-5% range, think of firms that have demonstrated pricing power in the past three years. It’s these firms that I think will continue to be great bets if you’re in the belief that rate cuts will set the stage for a rise in the rate of inflation.
Coca-Cola
Coca-Cola (NYSE:KO) is a Warren Buffett staple that’s worth buying up if you think inflation could start becoming a problem again. The legendary cola maker may have had to increase prices over the year, but still, the consumer has shown they’re not as willing to trade down to anything else.
Indeed, if you’ve spent a lifetime drinking Coke, switching to another brand to save a few dollars often isn’t worth it. It’s not just the unique taste and mouth feel of Coca-Cola, but the red cans and bottles that many reach for without giving a second thought.
That’s pricing power that can not only survive another inflationary spike, but one that could help KO shares make a run for new highs. The stock trades at 23.7 times trailing price-to-earnings (P/E), which is neither rich nor deeply discounted. If you expect inflation, though, I view the 3.1%-yielding dividend payer as an attractive way to play defence in Q4.
Deutsche Bank recently named KO stock as a top pick in the fourth quarter, citing its global momentum even in the face of recent “near-term volumetric challenges.” With a $81 price target on KO shares, the bank sees more than 20% in gains from the staple from these levels. Perhaps it is time to buy the dip in the long-term Buffett stocks, especially before most others look to play defense or shelter from the next tech-driven correction.
McDonald’s
McDonald’s (NYSE:MCD) may have stumbled slightly in its response to inflation in recent years. However, I think the legendary fast-food firm will be better able to handle a rise in inflationary pressures in the future, especially as the firm stays true to its value menu while finding new ways to stay innovative.
In any case, I think eating at McDonald’s is more convenient and, in some cases, cheaper than grocery shopping to recreate something that one could have picked up on the value menu on the cheap. Combined with a great loyalty app that drives foot traffic via targeted offers, I think McDonald’s is a great place to eat and invest when inflation rises by a few notches. If McDonald’s doesn’t raise prices significantly when inflationary pressures rise again, I think it could be a significant market-share taker.
Furthermore, over the longer term, I view McDonald’s as well-equipped to enjoy considerable cost savings as AI finds its way into more McDonald’s kitchens (think automated fryers and the rise of robotic labor). The company has already done great with its self-ordering kiosks. Next, it’ll bring next-gen AI tech to the drive-thru, kitchen, and supply chain. Indeed, the potential cost savings gains are considerable, and could help McDonald’s ultimately win the value wars in five years’ time.
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