Rising prices are a problem for many businesses. As prices rise, costs to consumers do too. The company can eat the cost and show less profit, or it can pass the cost on and risk losing sales. To quote an Eastern European pearl, both are worse.
But rising prices are not a problem for all businesses – and some of the best food stocks are poised to profit in this higher inflation environment.
As prices rise, some companies are able to buy materials and inputs better, smarter or in large volumes. Additionally, there are firms that are able to get the raw materials they need in regional markets where prices are more attractive than what their competitors are paying. For instance, natural gas prices in the U.S. are much lower than gas prices in Europe right now, giving companies with domestic supplies an edge. And still, other firms are able to find new ways to reduce their operating costs further.
Finally, there are those lucky and skilled businesses that are able to reduce their product costs and operating costs at the same time, providing a one-two punch to boost earnings. And if these same companies can pass their price increases onto customers without suffering a loss of demand, well, they’ve hit the trifecta.
The food stocks featured here are hitting some or all of these markers amid rising prices and disruptions in the supply chain. For these reasons, they might be some of the most satisfying food stocks to buy during a period of high inflation. Check them out.
Data is as of Aug. 5. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks are listed in reverse order of dividend yield.
1 of 6
Costco WholesaleGetty Images
Market value: $239.5 billionDividend yield: 0.7% While Costco Wholesale (COST, $540.67) may not be the first name that comes to mind when thinking of the best food stocks, the discount retailer is a solid performer in normal times – and an even stronger one during inflationary times. The proposition Costco offers consumers is almost irresistible: When prices are rising left and right, buy in large quantities to reduce your costs.
Proof of its power can be seen in its same-store sales, which, company wide, were up 16% in fiscal 2021, though this includes gasoline sales, which have been on a tear owing to high energy costs. For perspective, same-store sales growth was flat for the year ended June 30, 2016, though this metric does fluctuate.
A look under the hood shows for the first half of its current fiscal year that merchandise costs were almost exactly the same as a year ago, or about 87% of sales. Even this is a victory though, as rising prices don’t impact just consumers, they impact companies, like Costco, that sell to consumers. So, a level gross margin means smart, effective buying. It also means that the growth in net income to $2.6 billion from $2.1 billion, or about 24%, came almost exclusively from Costco’s ability to manage its selling, general and administrative costs.
Costco’s e-commerce business has been gaining momentum too, de rigueur in a rapidly evolving retail landscape, growing nearly 13% in its fiscal second quarter. And while Costco may be lagging in the online shopping race versus the likes of Walmart (WMT) and Target (TGT), legendary investor Charlie Munger believes that the company has the ability to become an online “titan” due to its huge following that trusts its “curated products.”
There’s a lot to like about Costco: Smart management, plenty of cash in the bank and nice growth in the dividend. The board increased the quarterly payment to 90 cents per share in April, and at $3.60 annually, it’s relatively small, yielding just 0.7%, but it’s also a grower. Value Line pegs average annual growth at 13.5% over the last 10 years.
All this goodness comes at a price though. Costco is currently trading at 37.7 times forward earnings – higher than its five-year average. The wise investor will keep an eye out for a pullback.
2 of 6
CF IndustriesGetty Images
Market value: $19.9 billionDividend yield: 1.6% Basic economics makes the case for fertilizer firm CF Industries (CF, $100.05) being on this list of best food stocks. Global demand for fertilizer is strong, but the supply is constrained. Prices are up.
And here, CF has an advantage over many other fertilizer producers. The company relies chiefly on domestic sources of natural gas, critical for manufacturing fertilizers, where prices are much lower than other sources. The company’s fourth-quarter earnings report shows that natural gas from the Henry Hub delivery point in Erath, Louisiana, is less than $5 per MMBtu (Metric Million British Thermal Unit) while non-domestic prices are between $25 and $30 per MMBtu.
These supply and demand dynamics have dropped nicely to the bottom line for 2021. Diluted earnings per share for 2021 were $4.24 versus $1.47, up 188%. Moreover, trends are expected to continue. “Strong performance will likely continue going forward, and we anticipate dramatic growth in sales and earnings for the current year,” says Value Line analyst Michael Napoli.
If the bottom line has been aided by supply and demand dynamics, it’s also been helped by arithmetic. CF Industries is an inveterate buyer of its stock, completing about $1 billion of share repurchases in 2021. This is likely to continue. In November of 2021, CF’s board authorized $1.5 billion in new share repurchases.
3 of 6
AlbertsonsGetty Images
Market value: $14.4 billionDividend yield: 1.8% The case for a closer look at supermarket chain Albertsons (ACI, $27.05) as one of the best food stocks might start with the same-store sales figures shown in its most recent full-year report. From two years ago, same-store sales were up a very muscular 17%. Parenthetically, the publication of two-year same-store sales is a bit unusual, but it does provide context for the impact of the pandemic.
Regardless, a jump of this magnitude for same-store sales merits a closer look. In part, it’s driven by inflation. The aisles of Albertsons are where the rubber hits the road for higher food prices, which go right to Albertsons’ top line. The Department of Agriculture’s Economic Research Services reported that food prices increased 3.5% in 2020 and 3.5% in 2021.
But the 7% total growth in food prices is a long way from the 17% increase in same-store sales for the same two years. Clearly, the pandemic has brought more customers through the doors of Albertsons.
Ultimately, all this growth on the top line is for naught if the company can’t bring it to the bottom line. And here, the consumer staples stock has shown success. For fiscal 2021, which ended Feb. 26, 2022, earnings were up 84% on a year-over-year basis.
Where did this come from? Smart buying and smart management. Smart buying can be seen in Albertsons’ gross margin (sales less cost of the goods it sold), which went down from 29.3% to 28.8%, which is huge in an industry where net profit margins have been between 1% and 2% for most of this century.
The company’s operating expenses – the cost of maintaining stores, paying employees, marketing, among other operating items – fell too, from 27% to 25.5%, meaning the management at Albertsons sharpened their pencils and found new ways to run the business more inexpensively.
Of note, the improvement on the gross margin of 0.5% delivered the bigger punch to earnings, since 0.5% of $72 billion in total sales, or $360 million, is much larger than the 1.5% improvement on total operating expenses of $18.3 billion, which added “just” $270 million.
After releasing their year-end figures, ACI shares took a hit, presumably because of the cooler outlook for 2022 that it offered shareholders. Sometimes companies like to underpromise and overdeliver.
However, maybe Albertsons’ management really does have the willies. Hanging over the recent performance was a Feb. 28 announcement of a “Board-led review of potential strategic alternatives,” which can mean the company is for sale. The announcement was gilded with all of the familiar corporate speak about enhancing shareholder value, but the inclusion of “responding to inquiries” did stick out like a sore thumb, even if it’s a green one.
4 of 6
Tyson FoodsGetty Images
Market value: $31.6 billionDividend yield: 2.1% As prices rise, Tyson Foods (TSN, $87.45) appears to be gaining momentum. In fiscal 2021, which ended Oct. 2, net income grew about 48%. But it was up 107% in the fourth quarter, indicating a better performance during the greater part of the year. And in the first nine months of its fiscal 2022, net income is up 59%.
All this success amid a pandemic has attracted ire, however, with the White House accusing Tyson – as well as three of its competitors, which control the majority of the protein market – of profiteering. Tyson “categorically rejects” these charges, citing labor challenges, a $22-hour wage for frontline workers, and “unprecedented market shocks.”
This may be, but arithmetically, if prices rose in lockstep with costs, the net income would not have more than doubled for the first quarter. For perspective, before the pandemic, it took TSN five years to double its annual net income from about $1.0 billion in 2014 to about $2.0 billion in 2019.
Pure capitalists might nonetheless be encouraged that Tyson is well-positioned to capitalize on further disruption in the food supply. First, it’s conservatively capitalized, with total debt just half of shareholder equity. Next, TSN has done an admirable job of improving margins amid tepid top-line growth. The average annual increase in sales in its most recent fiscal year was just over 5% since 2019. But operating income has grown more than 25%, on average, annually during the same period.
Looking a little more closely, it seems that Tyson made more operating margin by controlling operating costs than it did by controlling production costs, though it has improved both over a three-year period. Improvement in gross margin again cast doubt on the impact of inflation on input costs.
Nonetheless, TSN has proved it can operate and even prosper in difficult environments – making it one of the best food stocks to watch. And with wheat production in question, rising fertilizer costs and continuing supply-chain disruptions, there will be plenty of opportunity for Tyson management to put its mettle on display.
5 of 6
KrogerGetty Images
Market value: $33.8 billionDividend yield: 2.2% The pandemic has been good for Kroger’s (KR, $47.25) business. During the last two years, same-store sales increased more than 14%, net of its fuel business at convenience stores, which in 2021 was nearly $15 billion. Still 14% is a big number largely because consumers are eating more at home.
The key of course is to translate those high prices for food into higher earnings. Here, Kroger has succeeded, with operating income growing about 20% year-over-year. It’s important to keep in mind that margins in the supermarket business are slim with little room for error. In this case, the overall operating margin went from about 2.1% to about 2.5%. The gain can be attributed to managing the cost of goods sold and the company’s operating expenses.
KR added a little leverage to its earnings with stock buybacks, reducing its share count from 2 billion shares to 1.9 billion. It’s hard to read the performance in earnings per share due to a series of adjustments in the most recently reported fiscal years, which include a loss of $821 on an investment in 2021. Taking adjustments into account, it looks like earnings per share grew about 12% year-over-year in fiscal 2021.
Kroger has guided modestly, with same-store sales projected to grow 2.5% to 3.5% this fiscal year, exclusive of gas sales, and with adjusted earnings per share of $3.85 to $3.95. This guidance may be conservative, as food inflation seems to be gaining strength along with renewed pandemic concerns. Investors wanting to watch for the best food stocks should definitely keep KR on their radar.
6 of 6
NutrienGetty Images
Market value: $46.2 billionDividend yield: 2.3% As prices of commodities continue to surge, Nutrien (NTR, $83.80) – which produces potash, nitrogen and phosphate for fertilizers – is rising with the tide. And with the war between Russia and Ukraine, and the sanctions imposed on Russian ally Belarus ramping up the global demand for potash, there’s a lot of opportunity for Nutrien to fill in the gap.
Recent performance bears this out. Net earnings for the year ended Dec. 31, were 593% higher to $3.2 billion – up roughly the same amount on a per-share basis to $5.52.
Management seems to have the conviction that trends will continue with guidance for adjusted net earnings per share of $10.20 per share to $11.80 per share for 2022. Adjusted earnings per share were $6.23 for 2021, so at the high end of guidance, management is forecasting nearly a “double” for 2022.
Parenthetically, the adjustment in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) consists primarily of depreciation and amortization, which are non-cash. Nutrien is an aggressive acquirer, with 14 deals in 2021, so depreciation is a material charge to earnings.
The increase in earnings from the top line will continue to be abetted by an aggressive share repurchase program. The board approved the purchase of up to 10% of Nutrien’s outstanding common shares over a one-year period. The dividend was increased with the last earnings report in February from 46 cents per share to 48 cents per share, and the materials stock yields a respectable 2.3%. So not only is it one of the best food stocks, it’s a solid choice for income investors.