Four US stocks to own for pricing power

With inflation so high, these big American companies that can make price rises stick have caught the attention of our overseas investing expert. Find out which ones he'd buy and when. 

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

One recurring theme among American companies reporting results for the final three months of 2021 has been rising costs, partly because of rising wages and partly through supply chain restraints. While supply chains are being sorted out, higher wages are here to stay as workers struggle to keep up with rapidly rising prices. In a vicious inflationary circle, investors should look for companies that can make their own price rises stick.

Higher costs have put a bit of a dampener on otherwise excellent results from restaurant chain McDonald's (NYSE:MCD). In common with many employers in the United States, it was forced to pay higher wages to recruit and retain staff; the cost of chicken and beef rose; and packaging was expensive and hard to come by because of supply chain problems. 

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Operating costs rose a worryingly high 14% in the last three months of 2021 and will continue to be higher in the current quarter. 

Wages are not going to come back down, although supply chain issues are already easing. McDonald’s will also take comfort from the fact that it has been able to pass on higher costs by raising its prices without driving customers away, a difficult exercise for a chain that promotes itself as being cheap and cheerful.

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Reopening restaurants after the Covid-19 restrictions in 2020 helped to boost revenue by 13.8% in the US, and sales were also up strongly in Britain, France, Germany and Italy. That trend continued in the final quarter, with total sales 13% higher, and should run into this year, assuming the worst of the pandemic is over, although the gains will probably not be as dramatic. 

The main hopes for further recovery lie in Australia, which continues to be relatively flat while tight Covid restrictions remain, and in China, where results were dented by a resurgence in the virus. 

Fourth-quarter net profits rose 19% year on year to $1.6 billion, a little shy of expectations but a welcome recovery nonetheless.

The shares bumped up against $270 in January before falling back and the fourth-quarter profit figures, slightly below expectations, were initially greeted with disappointment. However, the stock has bottomed at $249 and is creeping higher again. The yield is 2.05%.

Past performance is not a guide to future performance.

Rising costs have also been a concern for Procter & Gamble (NYSE:PG) but the latest quarter, the second in its financial year, has proved much better than the first in terms of profits and has allowed the consumer products group to raise its outlook for the full year to June.

Sales rose 6.1% year on year in the three months to 31 December to $20.95 billion. Even more commendable was a 7.4% rise in pre-tax profits to $5.24 billion. P&G now expects total sales growth of 3-4% for the full year, a small increase on previous guidance, led by stronger than expected growth in organic sales of products such as Gillette razors, Olay face cream, Pantene shampoo and Pampers nappies, all strong brands.

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P&G did not raise its profits guidance, but it is better to be realistic than to raise false hopes. Share buybacks could hit $10 billion this year on top of $8 billion being paid in dividends. 

Despite a 3% boost to the share price when the figures were announced, the stock is still stuck around $160, where the yield is a solid if unexciting 2.17%.  

Past performance is not a guide to future performance.

Among companies that had a good pandemic were 3M Co (NYSE:MMM), whose hand sanitisers and safety glasses were in great demand. The healthcare and consumer goods conglomerate managed to continue that performance through 2021, with net sales up 10% to $35.35 billion and pre-tax profits 6% higher at $7.2 billion.

One worry is that, with Covid restrictions easing, the fourth quarter signalled that life will get tougher. Sales were only 0.3% higher between October and December while pre-tax profits tumbled 9.6% to $1.56 billion.

Chairman Mike Roman has vowed to concentrate investment on those end markets that are fast growing and able to sustain long-term growth. He has a clear picture in making those decisions, since consumer goods are far outstripping the rest in terms of growing sales. Unfortunately, the highest selling of the four divisions is safety and industrial, where growth is currently weakest. 

The shares have been on a downward trend since hitting $206 in June and now stand at $167, where the yield is an attractive 3.63%. 

Past performance is not a guide to future performance.

First, we drowned our sorrows during lockdowns; then we made merry as Christmas was restored. Things should be looking up for drinks companies such as Mondelez International (NASDAQ:MDLZ), which also sells confectionery, food and snacks.

The Illinois company increased revenue by 4.9% to $7.66 billion in the final quarter, but the figures were distorted by adding in sales from acquisitions such as Gourmet Food. Disappointingly, net income was dented by losses on derivatives and from higher restructuring costs, which rather took the shine off what had been a good year. For 2021 as a whole, revenue rose 8% to $28.72 billion and net earnings 21% to $4.31 billion.

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In 2022, Mondelez expects underlying 3% growth in net revenue and a high single digit rise in earnings per share.

The shares were just $40 at the start of 2018 and have been as high as $68 already this year. The current $66.50 gives a yield of 2%.

Past performance is not a guide to future performance.

Hobson’s choice: I first tipped McDonald’s when the shares were below $200 and repeated the buy advice twice at $237 and once at $255. The advice still stands at the current $258.

I was very cautious about Procter & Gamble in October, when sales were up but profits were down, and suggested taking profits at $140 at that point. The outlook is now distinctly brighter and investors who stayed in should hold on. Another good quarter and the $163 ceiling will surely break.  

Shares in 3M could find support around $160. I first recommended this stock at $167 and, despite the lack of progress in the share price, I believe this is still a buy. Those who followed my earlier buy advice have enjoyed a healthy dividend that is set to grow.

Mondelez shares look fully valued but are worth holding for those already in. Buy if they slip back below $60.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.