Inflation seems to be the only thing people are talking about these days. Skyrocketing food prices. The cost of filling the gas tank. Rising mortgage costs. The list goes on. Even with the rate of inflation gradually declining, pocketbooks are hurting.
The Bank of Canada and other central banks are contributing to the problem by steadily raising interest rates to dampen demand and slow the economy, to the point where the Consumer Price Index will slip back toward the BoC’s 2-per-cent target. Rate hikes are a crude weapon because of the misery they inflict on businesses and individuals, but they seem to be the best option in this situation.
Rising interest rates were the main contributor to the woes of the stock markets in 2022. Interest-sensitive securities such as REITs, utilities, telecoms and bonds all tumbled as rates marched steadily higher. Combined with the collapse of tech stocks as the stay-at-home pandemic economy dissipated, we ended up with all the major stock markets in the red and the Canadian bond market experiencing its worst loss in four decades.
But there were some inflation-beaters. These securities thrived in a rising price environment and are still doing well, although momentum is slowing.
Fossil fuel companies
The price at the pumps has dropped in recent weeks as oil prices have eased, but the big producers are still making bucketloads of cash at current levels. We haven’t seen year-end results from any of the major companies yet, but ExxonMobil Corp. (XOM-N) reported nine-month 2022 profits of just under US$43-billion (US$10.17 per share), compared with US$14.2-billion (US$3.31 per share) in the same period last year. Year-end results are due Jan. 31.
It’s the same story in Canada, albeit on a smaller scale. Canadian Natural Resources Ltd. (CNQ-T) reported a nine-month adjusted profit of $10.7-billion ($9.20 per diluted share), up from $4.8-billion ($4.04 per share) the year before.
The TSX Capped Energy Index ended the year with a gain of 48.4 per cent, and many companies were well ahead of that, including Enerplus Corp. (ERF-T, up 79.2 per cent), Cenovus Energy Inc. (CVE-T, up 69.4 per cent) and Tourmaline Oil Corp. (TOU-T, up 67.3 per cent). Oil service companies also did well – Precision Drilling Corp. (PD-T) shares gained 132.1 per cent in 2022.
So far, 2023 is off to a positive start for the sector. As of Jan. 20, the S&P/TSX Capped Energy Index was ahead 2.46 per cent. I don’t expect this year’s gains to be anywhere near as robust as those of 2022, but the energy sector should continue to be a source of profits for investors.
Food retailers
They have become the No. 1 villain for shoppers and politicians. They claim the rising costs of everything from vegetables to milk are not their fault, but their profits keep rising nonetheless.
Loblaw Companies Ltd. (L-T) reported third-quarter net earnings attributable to shareholders of $556-million, an increase of $125-million, or 29 per cent, from last year. Diluted earnings per share were $1.69, an increase of 42 cents, or 33.1 per cent.
Empire Company Ltd. (EMP.A-T), which owns Sobeys, Farm Boy, etc., reported second-quarter 2023 profits (to Nov. 5) of $189.9-million (73 cents a share), up from $175.4-million (66 cents a share) in the previous year. That works out to a gain of 10.6 per cent on a per-share basis.
Metro Inc. (MRU-T), which had a Sept. 24 year end, reported fiscal 2022 profits of $849.5-million ($3.51 per diluted share) compared with $825.7-million ($3.33 per share) in the previous year. That was a gain of 5.4 per cent on a per-share basis.
Both Metro and Loblaw posted decent gains in their share prices last year of 11.4 per cent and 15.5 per cent respectively. Empire shares actually lost 7.5 per cent in 2022. So far this year, its shares are marginally ahead, while those of Loblaw and Metro have slipped slightly.
Looking at the overall picture, inflation has had a modestly positive impact on food retailers, but nothing as dramatic as we saw in the energy sector. Looking forward, public and political pressure will likely force these companies to maintain or even slightly reduce their already thin profit margins this year. Any profit increases will be modest, as will gains in the share price.
Gold
Here’s a latecomer to the inflation party. Gold is typically a refuge in inflationary times, but rising interest rates put downward pressure on the metal. (Gold pays no interest, so the higher rates rise, the greater the loss in potential interest for owners.) As a result, the S&P/TSX Global Gold Index was down 4.9 per cent last year.
But as the tightening cycle appears to be nearing an end, or at least a pause, gold has regained its lustre and investors are buying. The price has moved to US$1,928 an ounce, and the Global Gold Index is up 10.89 per cent so far this month. A price of US$2,000 an ounce within the next few weeks is a real possibility.
My go-to stock in the gold sector is Franco-Nevada Corp. (FNV-T), which I have owned for years. It’s a royalty streaming company, which means it provides financing to other miners in exchange for a small percentage of the output. This means it bears no exploration, construction or closing risks. Several other companies operate on this model, but I regard FNV as the preferred choice.
The stock touched a one-year low of $151.07 in September, but the recent turnaround in the price of gold has pushed it up quickly. It closed Friday at $196.67, up almost 30 per cent from the September low.
Last week, the company announced a 6.25-per-cent increase in its quarterly dividend, to 34 U.S. cents a share (US$1.36 a year). The stock yields 0.9 per cent at that price – not a lot, but there is good upside potential in the share price if gold moves higher.
Results for the first nine months of 2022 showed adjusted net income of US$532.7-million (US$2.78 per share), up 5 per cent from the year before. The company will release final 2022 results on March 15.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
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Gordon Pape