With inflation hitting levels not seen for decades, the real value of our money is getting eaten away. One way I am trying to combat the effect of inflation on my finances is by buying shares in large companies I think have resilient business models. I hope that, through a combination of capital gain potential and dividends, this might help me battle inflation in coming years. If I were to put £1,000 into this strategy right now and target FTSE 100 shares, here is what I would do.
Investing for high inflation – and beyond
I would not build my portfolio just around the principle of picking shares I felt could fight inflation. After all, at some point the laws of gravity will assert themselves and inflation will start to come down again. So I would be looking for companies I felt had a business that was able to deal with inflation, but also could do well in a low inflation environment.
An example of such a share in my portfolio is consumer goods giant Unilever, a longstanding FTSE 100 member.
It has certainly been in the frontline of the inflation battle, expecting to deal with net material inflation for the year of around €4.6bn. But its premium brands give Unilever pricing power, allowing it to increase prices without necessarily losing lots of sales. That was seen in the first half, when sales revenues grew 8.1% compared to the same period last year even though volumes shrank by 1.6%. I think that pricing power is helpful to Unilever even when there is no inflation, as it can help the firm to achieve strong profit margins.
Assess short-term business risks
Although my focus is on long-term investing, that does not mean I would not consider the likely impact of inflation on some companies in the short term.
For example, I think a FTSE 100 company like Auto Trader ought to be able to lift prices to deal with inflation. It has limited physical inputs so may not suffer from the same sort of cost inflation seen at Unilever.
By contrast, it will be hard for a company like Associated British Foods to escape some impact from inflation as it relies on so many physical inputs like raw materials and ingredients. Like Unilever, perhaps ABF’s premium brands can help it raise prices. But the more risk a company faces from inflation, the more risk I see that it will struggle to manage it.
Buying quality FTSE 100 companies more cheaply
As I am investing for the long term, why do I consider these short-term points? It is because they may change investor sentiment. That could give me a buying opportunity for businesses I like that have seen their prices beaten down partly due to inflation worries.
Auto Trader has shown a very modest gain in the past year, of less than 1%. But Unilever shares are down 3% and ABF has fallen 23%. I like the long-term business prospects for ABF and the shares now look more affordable as a possible addition to my portfolio than they did previously.
With £1,000 I could diversify across a range of quality FTSE 100 companies when inflation worries drag down their share prices. Now strikes me as a good moment to hunt for such shares.