Inflation in the UK is currently up around 9%. And it’s widely tipped to climb into double digits. Finding shares to beat inflation, or at least help towards that goal, isn’t easy.
Companies in highly competitive markets are surely going to suffer. It means they don’t have much pricing power. We’ve seen a couple of examples recently. Motor insurer Sabre Insurance crashed after first-half results revealed a plunge in profits. The company put it down to “extraordinary inflationary pressures.”
Direct Line Insurance suffered similarly, also hit by inflationary costs. Its wider product range shielded it a little, but it was still painful.
One possible approach is to look for companies offering premium products with healthy margins. Hopefully, those should be more resilient in the face of inflation.
High margins
Diageo springs to mind, with its huge range of brands. It might appear to be up against plenty of competition in the alcoholic drinks market. But it’s surprising how many apparently competing brands are actually owned by Diageo itself.
It’s easy to misjudge the value of some of Diageo’s labels too. Johnnie Walker might just seem like one brand among hundreds. But in large parts of Asia it’s a prestigious one.
Essentials
We can also try to stick with companies offering essential products and services, stuff that people can’t do without. Ideally, I like to see as little competition as possible too. After all, car insurance is an essential, but competition is strong.
BP and Shell seem to fit the bill. Both have seen their share prices climbing, and both are paying attractive dividends. There is one caution, though. It just happens that world events pushed the oil price up, and that’s behind the gains.
The escalating fuel price does play its part in inflation, mind. But it’s possible that oil might have nothing to do with our next inflationary spell. And a volatile oil price might even cause more damage to investors than inflation in the future.
Protective moats
National Grid looks resilient to me. It enjoys a bit of a monopoly in UK energy supply. And in inflationary times, energy providers can hardly look elsewhere for alternative routes to market. Water companies, like SSE, are in a similar position to National Grid.
Big pharmaceuticals firms like AstraZeneca and GSK also strike me as being resistant to rising prices. They research and develop patented blockbuster drugs. And they can adjust their pricing to deal with inflationary costs without fear of being undercut.
Long term
I think the best approach to beating inflation with our investments, though, is relatively straightforward. It can be very hard to find shares to keep us ahead of a year of 10% inflation. So I’m not even trying to do that.
Instead, I’m sticking to buying top-quality companies with competitive advantages. And I look for healthy cash flow to fund progressive dividends. I fully expect to lose out to inflation this year. But over the long term, I reckon my chances of beating it are high.
In fact, I’d say the best shares to buy to beat inflation over the long term are the exact same ones I’d buy anyway.