Some companies in “surprising” industries such as tech and entertainment have utility-like characteristics that prove attractive in times of inflation and market volatility, Invesco’s Stephen Anness believes.
In times of galloping inflation, a good investment strategy is to buy companies that can pass on inflation costs down to consumers. If demand for their goods and services remains constant, they have the ability to raise prices in line with inflation and therefore continue to pay dividends.
Typically, this is the case for utilities: electricity, water and telecoms are necessities and the last costs we cut when times are hard. But similar inflation-proof qualities can be found in other sectors as well.
Below, Anness, head of global equities at Invesco and manager of the Invesco Global Equity Income fund, shares four companies with these characteristics. But, he assures, “once you start looking for these qualities, you find them everywhere”.
Tech
The manager’s first pick is Microsoft, thanks to its subscription-based software Microsoft Office.
Microsoft share price performance in 2022
Source: Google Finance
Not only do clients need to continue to pay in order to use the tool, but it is also ubiquitous and difficult to substitute.
“Microsoft Office is so deeply embedded in workflows worldwide that replacing it with a new system would be an enormous task for any chief technology officer,” he said.
“Consider how many companies relied on Microsoft’s video-conferencing software, Teams, to continue working during the pandemic – and how many continue to use it today to support hybrid working.”
Communications frameworks
A second pick is American Tower, which owns and operates wireless and broadcast communications infrastructure, more specifically the towers that hold satellite dishes for phone companies.
American Tower share price performance in 2022
Source: Google Finance
“It is one of our biggest holdings,” Anness explained.
Individual phone companies would struggle to build towers just for their own dishes as competitively as renting from American Tower, so the business has very high levels of client retention and the fees it charges for renting tower space are typically linked to inflation.
“The phone companies themselves are good at passing on costs. This is because, though we can put off upgrading handsets, few of us can survive without a mobile phone service. So income looks secure, too, in our view.”
Audio
The third business on Anness’ list is Universal Music Group, which owns and operates businesses engaged in music recording, publishing, merchandising and creating audio-visual content.
Universal Music Group share price performance in 2022
Source: Google Finance
Although one cannot claim that music is as essential to life as water or electricity, it is still one of the last costs consumers cut.
Modern technology allows Universal Music to monetise its catalogue better than ever, picking up when music is being used for commercial purposes online and by broadcasters.
“It owns the music rights to many of the world’s best artists, past and present, and clips royalties every time its artists are streamed. Film producers, advertisers and videogame creators all use music and must pay for it,” Anness said.
Lifts
Lift manufacturer Kone is one last example of utility-like companies.
Microsoft share price performance in 2022
Source: Google Finance
Installing a new lift is expensive and time-consuming and can cause major disruption, especially in large office blocks with hundreds of people going in and out all day long. A building owner is unlikely to install a new lift without good reason, noted Anness.
Additionally, there are usually regulations imposed upon owners of public buildings, requiring them to have their equipment serviced regularly.
“Ongoing equipment maintenance rather than installation is where lift companies make most of their profits from. This means recurring income for manufacturers,” the manager said.