In March, inflation surged by 8.5%, representing the highest increase since 1981. This four-decade high affects everything from energy to food costs. In a rising cost environment, where should you put your money?
How Inflation Affects Your Portfolio
Since inflation increases the price of goods and services, it also lowers each dollar’s purchasing power. Consumers are forced to tighten their belts, making fewer purchases and so the economy slows down.
A primary concern among consumers and investors is that inflation often leads to rising prices with no corresponding increase in value for goods and services received. Consumers simply pay more for less.
Companies that have pricing power tend to survive best in inflationary environments. But inflation itself has been described as a tapeworm, working its way through the economy; it essentially does no good and most companies are adversely affected by it.
As inflation rises, the Fed attempts to combat it through rising interest rates, which in turn makes it more costly for companies to service debt payments. Banks are on the other side of the fence, and can benefit through higher net interest margins.
Companies that typically survive better in inflationary environments are those in the energy, healthcare, consumer staples, and utility sectors. Dividend-paying stocks are another way to protect yourself, but above all else, it’s crucial to build a diversified, balanced portfolio.
OneMain Holdings (OMF): 23.7% Upside to Fair Value
OneMain Holdings, Inc. is an online and brick-and-mortar lender with 1,400 locations across 44 states.
It claims to “provide real lending solutions for real people.” Being a trusted lender for over 100 years, OneMain is a brand consumers know and trust. Because the company specializes in lending to non-prime customers, higher interest rates should help to improve profit margins.
OneMain Holdings offers a dividend yield of 8.2%, equating to $3.80 per year (the last quarterly dividend yielded $0.95 per share). Although OMF shares have declined by over 17% this past year, investors enjoyed a more than 91% increase over the past five years.
As of the writing, shares of OMF are hovering just above the stock’s 52-week low of $42.13. When we ran the numbers on OneMain, we calculated a fair market value of $57.03, representing 23.7% upside at the time of research.
Will Arbor Realty Trust (ABR) Rise 18.6%?
Arbor Realty Trust is a real estate investment trust (REIT) that provides loans and services for multifamily and single-family rental properties. Over 80% of the company’s total loan portfolio focuses on the multifamily housing sector — a space that has high barriers to entry, giving Arbor Realty a competitive edge.
On average, multifamily housing tends to weather recessions better than single-family housing. So, ABR is in a good position regardless of inflation. The company is also growing steadily, reporting a GAAP net income of $2.28 per diluted common share, representing a 15% increase over last year and an industry-leading return on equity (ROE) of over 19%.
ABR has a trusted history of dividend payments. The company has raised its quarterly dividend for ten consecutive years. Investors recently received $0.37 per share, representing a 23% increase over the past seven quarters.
As of this writing, shares of ABR are sitting between the 52-week low of $15.95 and the 52-week high of $20.74. Shareholders have enjoyed over 6% growth in the past year and a more than 102% increase over the past five years.
When examining the company through the lens of valuation, ABR has the potential to rise up to $20.79 per share, an 18.6% premium to the current price at the time of writing.
Rising Interest Rates Are a Double-Edged Sword
Rising interest rates are beneficial for both OneMain Holdings and Arbor Realty Trust as higher rates support higher profit margins. Despite that, there is one concern — rising rates may also reduce the demand for loans. However, when looking at each of these businesses, focusing on their history and future growth plans, OMF and ABR are solid investments, especially at the current market prices.