The latest inflation data wasn't what the market wanted to see. The Consumer Price Index (CPI) rose by 0.5% month over month in January, and 3% year over year. That was higher than expected -- the consensus had been for a 0.3% monthly rise and a 2.9% annual pace -- and well above the Federal Reserve's stated target of around 2%. Meanwhile, another inflation gauge, the Producer Price Index (PPI), rose at a seasonally adjusted 0.4% rate last month, which was higher than the 0.3% increase economists expected.
Hotter-than-expected inflation is bad news for consumers and borrowers. It will likely prevent the Federal Reserve from making more reductions to its benchmark interest rate anytime soon.
However, some companies stand to benefit from inflation. Two notable beneficiaries are W. P. Carey(NYSE: WPC) and Brookfield Infrastructure(NYSE: BIPC)(NYSE: BIP). Higher inflation should enable them to grow their cash flows faster in the future, which could support higher growth rates in their high-yielding dividends.
Linking rents to inflation
W. P. Carey is a real estate investment trust (REIT) that owns a diversified portfolio of high-quality, operationally critical properties. It focuses on single-tenant industrial, warehouse, and retail properties across North America and Europe, secured by long-term net leases with built-in rent escalators. Net leases require that tenants cover most of the operating expenses of the properties they occupy, including building insurance, real estate taxes, and routine maintenance. That tends to insulate the REIT from the impacts of inflation.
Meanwhile, W. P. Carey benefits from inflation thanks to those lease escalator clauses. Roughly 51% of its leases link tenants' rents to the CPI. Because of that, its rents grow faster during periods of elevated inflation. Last year, its same-store rent growth was above 2.6%, thanks to inflation.
W. P. Carey has also been focusing on investing in properties that benefit from inflation. It sold off its portfolio of office properties last year, which gave it the cash to invest in new properties. Many of its latest investments feature leases with inflation-linked rents. For example, it invested $191 million into a 19-property industrial and warehouse portfolio across the U.S. and Canada. The properties had a weighted average remaining lease term of 13 years. Rents on the U.S. properties will rise in sync with U.S. CPI, while the Canadian rents will escalate at a fixed rate. The company also bought several properties in Poland last year; their rents will escalate at a rate tied to the Eurozone's CPI.
The REIT's strategy of linking rents to inflation should enable it to continue delivering above-average rent growth compared to its net lease peers, which generally ink leases with fixed annual rent increases. That positions W. P. Carey to continue increasing its dividend, which currently yields 6.1%, and which could grow faster than the payouts of its peers if inflation remains high.
Inflation-fueled growth
Brookfield Infrastructure is a global infrastructure operator with investments across the utility, energy midstream, transportation, and data sectors. Those businesses produce stable cash flows. About 85% of its funds from operations (FFO) come from contracted or regulated assets.
Most of the company's financial frameworks benefit from inflation. About 70% of its FFO comes from assets that index the rates they charge to inflation. Meanwhile, the contracts for another 15% of its FFO have mechanisms that protect them from inflation.
This indexation to inflation provides Brookfield Infrastructure with stable and growing cash flows. The company estimates that inflation alone will add between 3% and 4% to its FFO per share each year. That helps support high organic growth rates.
For example, Brookfield delivered 7% organic FFO growth last year, driven by elevated inflation, stronger volumes, and recently completed capital projects. The company noted that high inflation allowed it to push through strong tariff (fee) increases in its transportation portfolio (7% across its rail network and 6% across its toll road portfolio).
Inflation should help drive additional growth for Brookfield in the coming years. Management believes that its growth drivers (which include inflation) can help power more than 10% annual FFO per share growth. That should support 5% to 9% annual increases in the company's dividend, which at the current share price yields more than 4%.
Cash in on high inflation
W. P. Carey and Brookfield Infrastructure benefit from elevated inflation rates because many of their contracts feature inflation escalation clauses. That's helping drive additional earnings growth for these companies. This growth should flow down to their dividends, which they expect to continue increasing. Because of that, they're great stocks to buy for those who want to cash in on inflation.
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Matt DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, and W.P. Carey. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
