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2 Stocks to Hedge Your Portfolio Against Inflation: XOM and MPW
Stock Analysis & Ideas

2 Stocks to Hedge Your Portfolio Against Inflation: XOM and MPW

Story Highlights

Despite high inflation, a few stocks remain unfazed and act as solid hedges. Here we’ll focus on one stock from the energy space (higher commodity prices to support energy stocks) and a REIT (with inflation-protected cash flows) to counter the negative impact of inflation on the portfolio.

As opposed to June, when inflation increased by 9.1%, it eased somewhat in July, rising by 8.5%. Despite the decline, inflation continues to remain relatively high. While a high inflationary environment and the Fed’s hawkish stance to lower the same is painful for the equity market, a few stocks remain unfazed by rising prices, offer safety, and can help beat inflation with ease. For instance, Exxon Mobil (NYSE:XOM) stock and Medical Properties Trust (NYSE:MPW) stock can be perfect hedges against inflation. Let’s see why. 

Exxon Mobil Stock

Inflation means higher energy prices, which is a boon for Exxon Mobil. A higher oil price environment boosts XOM’s financials, allows it to reduce debt, and enhance shareholder return. Overall, it supports the upside in XOM stock. 

XOM delivered adjusted earnings of $17.6 billion in Q2, up significantly from $4.7 billion in the prior-year quarter. Moreover, it nearly doubled from the Q1. Thanks to the higher price realizations, XOM stock has outperformed the broader market average with its returns and is up about 65% year-to-date. 

Further, its net debt to capital ratio continued to improve. XOM reported net debt to capital ratio of 13% in Q2 compared to 17% in Q1. Also, it returned $7.6 billion to its shareholders in Q2 ($3.7 billion in dividends and $3.9 billion in share buybacks).

Exxon’s CEO, Darren Woods, highlighted that higher price realizations, increased production, and aggressive cost-cutting measures continue to support its earnings and cash flows. Further, XOM is on track to repurchase its shares worth $30 billion through 2023. Meanwhile, its solid balance sheet positions it well to continue investing in growth projects and easily navigate uncertainty. Also, it offers a healthy dividend yield of 3.6%.

Is XOM a Buy Now?

With Saudi Arabia mulling production cuts, oil prices could continue to trend higher. With higher oil prices and growth in production, Exxon is poised to deliver strong financials in the coming quarters. 

Wall Street is bullish about XOM stock. It has received 10 Buy and three Hold recommendations for a Strong Buy rating consensus. Further, XOM stock has an Outperform Smart Score of 9 out of 10. Its average price target of $110.13 represents an upside of 12.5% from current levels.

Medical Properties Trust Stock

Medical Properties Trust is a healthcare-focused REIT (Real Estate Investment Trust). It owns 447 facilities and about 46,000 licensed beds in 10 countries. 

Its defensive portfolio (with hospitals accounting for about 90% of its total revenue), long lease expiration term, and inflation-based rent escalators position it well to deliver solid shareholder returns even during turbulent times. 

It’s worth mentioning that amid high inflation, MPW’s cash rents increase due to the built-in escalators. Thus, for 2023, its cash rents are expected to increase by $57 million. 

MPW’s geographically diversified real estate portfolio, high occupancy rate (hospital real estate stays leased), acquisitions, and inflation-protected cash flows could continue to support its net funds from operations and payouts. Further, its high-dividend yield of 7.61% is roughly enough to counter inflation. 

Is MPW a Good Long-Term Investment?

MPW’s business continues to deliver solid total shareholder returns (average annual total shareholder return of 12.46% in the last five years). However, analysts are cautiously optimistic about its prospects. MPW stock has received seven Buy and five Hold recommendations for a Moderate Buy rating consensus. Furthermore, it has a Neutral Smart Score of 7 out of 10. 

Meanwhile, analysts’ average price target of $18.58 implies 24.1% upside potential.

Bottom Line

Both XOM and MPW are poised to thrive amid inflation. Their decent dividend yields, growing cash flows, and strong businesses position them to navigate a high inflationary environment well and deliver solid total shareholder returns.    

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