Category: Stock Market

Shares in medicinal cannabis company Incannex Healthcare Ltd (ASX: IHL) are edging lower and now trade at 57.5 cents.

The Incannex Healthcare share price opened at 60 cents before reversing within minutes to bounce off a low of 56.5 cents.

Despite this, Incannex shares have outperformed this past month, having piled on another 60% in that time.

That’s well ahead of the S&P/ASX 200 Health Care Index (ASX: XHJ), which has jumped 3.4% in a month, whereas the benchmark S&P/ASX 200 Index (ASX: XJO) is up 1.48%.

Here are the details.

What’s up with the Incannex Healthcare share price lately?

Incannex’s share price hit its 52-week high in early trade today as investors continue piling into the company.

A raft of company and regulatory catalysts have propped up the Incannex share price over the past few weeks.

For instance, the company recently advised an ethics committee had approved its Phase 2a clinical trial investigating the efficacy of psilocybin for any primary anxiety disorder.

The trial is the first in the world to examine the safety and efficacy of this compound. Psilocybin is the psychoactive component of ‘magic mushrooms’.

Psychedelic medicine has been gaining traction in psychotherapy and psychiatry circles lately. This has brought about a number of clinical breakthroughs to complex mental conditions.

An ethics committee approving the trial is “an exciting step for Incannex… and for the emerging field of psychedelic medicine,” according to the doctor leading the study.

The company also released its quarterly report to finish October, where it outlined several investment highlights.

One key takeout was the company successfully raising $17.66 million from an option exercise program. This includes $8.2 million from its chief medical officer, Dr Sud Agarwal.

What else is playing a part?

In addition, Incannex recently engaged drug manufacturing company Procaps S.A. to develop soft gel capsules for its proprietary IHL-42X label.

Specifically, IHL-42X is indicated in the treatment of obstructive sleep apnoea (OSA).

OSA is a prevalent condition that has implications for mental, cardiovascular and physical health. Incannex is seeking to find a remedial breakthrough in this condition as well.

According to the company, Procaps has assisted in developing over 500 pharmaceutical and nutritional products in over 50 global markets.

It will now manufacture the capsules for Incannex’s IHL-42X cannabinoid product for use in pivotal Phase 2 and 3 trials.

Aside from this, Incannex also confirmed the recent success of its IHL-65A label in reducing inflammatory conditions such as rheumatoid arthritis.

The company showed data that its compound was up to 3.5x more effective at reducing symptoms associated with rheumatoid arthritis than conventional treatments.

Separately, the company also filed for F-1 registration to list its shares on the United States NASDAQ exchange earlier this year.

An F-1 is basically the same as an initial public offering (IPO) on the ASX. However, it is reserved for non-US companies who wish to list on an American exchange.

Incannex is proposing a public offering of American Depositary Shares (ADS) with each ADS representing 50 ordinary shares in the company.

Incannex Healthcare share price snapshot

The Incannex Healthcare share price has been one to watch these past 12 months. Incannex shares have rallied as much as 524% in that time.

This has come after it has gained another 274% this year to date. That’s well ahead of the broad indices and the benchmark’s returns, 11% and 13% respectively.

The post Here’s why the Incannex (ASX:IHL) share price has rocketed 60% in a month appeared first on The Motley Fool Australia.

More reading

• These were the best performing ASX cannabis shares in October
• Incannex (ASX:IHL) share price leaps 6% on manufacturing update

The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson

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The Westpac Banking Corp (ASX: WBC) share price is having a pretty decent day of trading so far this Monday. At the time of writing, Westpac shares are currently up a healthy 0.77% to $22.86 a share. That’s a meaningful outperformance of the S&P/ASX 200 Index (ASX: XJO), which is currently up by 0.36% at 7,470 points.

Westpac is also outperforming all 3 of its ASX big four banking rivals so far today. The National Australia Bank Ltd. (ASX: NAB) share price is the only other major bank currently in the green today. NAB shares are currently up by 0.15% at $29.24 a share. And in contrast to Westpac’s solid performance, both the Commonwealth Bank of Australia (ASX: CBA) and the Australia and New Zealand Banking Group Ltd (ASX: ANZ) share prices are in the red, by 0.33% and 0.18% respectively.

So what is going on with Westpac that is giving investors so much confidence in this ASX bank today?

Westpac share price rises amid new bond sale

Well, one possible reason could be the news that Westpac has just secured a US$5.5 billion bond placement. According to reporting in the Australian Financial Review (AFR) today, Westpac has raised US$5.5 billion “via the sale of three, seven, 15 and 20 year SEC registered bonds in a five tranche deal”.

Issuing bonds is one of the major ways a company can raise additional funding for its business. It involves the issuance of a bond, which an investor buys with the expectation of regular interest payments.

Until now, Westpac had spent roughly the last year relying on funding provided through the Reserve Bank of Australia’s (RBA) term funding facility, which was initiated as an emergency response to the COVID-19 pandemic. The report states that this deal “[marks] Westpac’s return to more normal levels of wholesale funding” after a period of relying on the RBA.

But if you think this deal marks the end of ultra-cheap credit for the ASX banks, hold your horses. Westpac will still be paying rock-bottom interest rates on these new bonds, with the 20-year bonds offering fixed interest investors an interest rate that is 1.23% higher than that of the US government’s treasury bills.

So why is this good for Westpac? The report states that “this week’s debt deal shows Westpac should have little trouble going back to public markets for its funding”. And that would be unequivically good news for shareholders. The cheaper and easier Westpac’s access to new funding is, the greasier its internal wheels get.

At the current Westpac share price, this ASX bank has a market capitalisation of $83.94 billion, with a dividend yield of 5.16%.

The post Westpac (ASX:WBC) just sealed a record bond deal. What could this mean for shareholders? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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With so many shares to choose from on the ASX, it can be hard to decide which ones to buy. The good news is that brokers across the country are doing a lot of the hard work for you.

Three top ASX shares leading brokers have named as buys this week are listed below. Here’s why they are bullish on them:

Macquarie Group Ltd (ASX: MQG)

According to a note out of Citi, its analysts have retained their buy rating and $226.00 price target on this investment bank’s shares. Citi notes that Macquarie’s shares have risen strongly this year. However, it still believes they can keep rising due to favourable tailwinds such as commodity price volatility and higher energy prices. The latter are supporting its gas marketing business. The Macquarie share price is trading at $202.05 on Monday afternoon.

Oil Search Ltd (ASX: OSH)

A note out of UBS reveals that its analysts have retained their buy rating and lifted their price target on this energy company’s shares to $5.65. UBS has upgraded the company’s earnings estimates to reflect higher oil price forecasts due to tighter than expected supply. In addition, the broker notes that the independent expert has recommended the Oil Search-Santos Ltd (ASX: STO) merger. UBS feels this development has de-risked things materially. The Oil Search share price is fetching $4.28 today.

Rio Tinto Limited (ASX: RIO)

Another note out of Citi reveals that its analysts have retained their buy rating and $115.00 price target on this mining giant’s shares. Citi likes Rio Tinto due to its bullish view on aluminium, which it expects to fall into a deep deficit in 2022. In addition, the broker believes the company will benefit from Chinese demand for higher grade iron ore. The Rio Tinto share price is trading at $91.97 this afternoon.

The post Leading brokers name 3 ASX shares to buy today appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The AGL Energy Ltd (ASX: AGL) dividend has been cut short following the company’s 2021 full-year results in August. This has led to investors continuing to sell off the energy company’s shares, leading to an almost 30% loss since the release.

At the time of writing, AGL shares are adding more pain to shareholder portfolios, down 1.12% to $5.32 apiece.

Let’s take a look at the AGL dividend policy.

A look into AGL’s dividend

The embattled company paid out an interim dividend of 41 cents on 26 March which included a 10-cent special dividend. The dividend was lower than the 47 cents declared in the prior corresponding period.

More recently, AGL’s final dividend came to 34 cents which was paid on 29 September. Notably, this happened to be the lowest amount given to shareholders since its half-year results in 2016.

Both interim and final dividends this year were also unfranked, as compared to the previous seven years. This means those who were eligible for any of 2021’s dividends missed out on the imputed tax credits.

The full-year dividend of 2021 stood at 75 cents, a big difference from the 98 cents recorded in the 2020 financial year.

More on AGL’s dividend payout ratio

In its full-year results, AGL delivered net cash from operating activities of $1,250 million, down 41% on FY20. A reduction in earnings and a small outflow from margin calls, associated with wholesale market positions, led the fall.

Underlying profit after tax dropped to $537 million, down 34% against the prior comparable period.

At the end of June, the company had approximately $600 million in cash and undrawn debt facilities available.

The full-year dividend was in line with AGL’s dividend policy to target a payout ratio of 75% of underlying profit after tax. The payout ratio is essentially the amount of a company’s earnings per share (EPS) that it pays out in dividends.

In response to AGL’s tough market conditions, the board terminated the special dividend program.

The company noted that a sharp decline in wholesale prices for electricity and renewable energy certificates affected its financial performance. AGL regarded the 2021 financial year as one of the most difficult energy markets on record.

AGL share price summary

In 2021, the AGL share price has continued to plummet in value, losing more than 55% for investors. When factoring in the last 12 months, its shares are deeper in the red, down almost 60%.

Based on the current AGL share price, the company has dividend yield of a mammoth 14%, and a market capitalisation of $3.5 billion.

The post What is the current AGL (ASX:AGL) dividend payout ratio? appeared first on The Motley Fool Australia.

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• What’s going wrong for the AGL (ASX:AGL) share price in November?
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• How did the AGL (ASX:AGL) share price perform in October?
• Is the AGL Energy (ASX:AGL) share price a value trap?
• Why is the AGL (ASX:AGL) share price having such a good start to the week?

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Motley Fool Australia Chief Investment Officer Scott Phillips joined Weekend Sunrise on Sunday to discuss the bumper Christmas trading expected for Aussie retailers, plus Afterpay’s move into banking and a welcome fall in the amount of credit card debt we’re carrying.

The post A bumper Christmas, Afterpay goes banking, and good news on credit. Scott Phillips on Weekend Sunrise appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips owns shares of NIB Holdings Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool Australia has recommended NIB Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Woodside Petroleum Limited (ASX: WPL) share price is well into the green in early afternoon trade, up 1.6% to $22.60 per share.

Below we take a look at the ASX energy giant’s divestment announcement that appears to be driving investor interest.

What asset sale was announced?

Woodside’s share price is moving higher today after the company reported it has entered into a sale and purchase agreement with Global Infrastructure Partners (GIP).

The agreement will see Woodside sell a 49% non-operating participating interest in the Pluto Train 2 Joint Venture.

Located in northwest Western Australia, Pluto Train 2 is part of the planned Scarborough development. That development will include a new LNG train and domestic gas facilities, which will be built at the existing Pluto LNG onshore facility.

Atop funding its 49% share of capital expenditure, the new JV agreement will see GIP fund approximately US$835 million of additional construction capex.

The transaction, and payment that Woodside will receive, is still subject to a number of conditions.

The payment side remains dependent on the actual cost to develop Pluto Train 2, currently estimated at US$5.6 billion to completion.

Should the capex spend come in at less than US$5.6 billion, Woodside will receive 49% of that underspend from GIP. On the flip side, if capital expenditures overrun the estimate, Woodside will foot the bill for 49% of that overspend (up to US$835 million).

Commenting on the agreement, Woodside’s CEO Meg O’Neill said:

We are very pleased to have GIP joining us in the development of Pluto Train 2, given their impressive credentials and extensive global capability… GIP’s investment will help fund the expansion of the world-class Pluto LNG facility. The LNG supplied from the expanded Pluto facility will assist our customers to achieve their decarbonisation goals through the energy transition…

Pluto Train 2 will be one of Australia’s most efficient LNG trains and with Scarborough gas containing virtually no carbon dioxide, this is an attractive investment in a decarbonising world.

Woodside anticipates the deal to be complete in January 2022. It will retain a 51% participating interest in the Pluto Train 2 JV and remain as operator.

The effective date of the transaction is 1 October.

Woodside share price snapshot

The Woodside share price is down 2% in 2021, trailing the 12% year-to-date gains delivered by the All Ordinaries Index (ASX: XAO).

Over the past month, Woodside shares are down 10%.

The post Woodside (ASX:WPL) share price lifts amid US$835 million Pluto deal appeared first on The Motley Fool Australia.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Across the country, lockdowns are indeed easing as we move towards Christmas and the end of 2021. But the CSL Limited (ASX: CSL) share price doesn’t quite look like it’s out of the woods just yet. That’s going off of this ASX 200 healthcare giant’s recent share price performance. CSL shares are, at the time of writing, trading at $310.96 each, up 1.16% for the day so far this Monday.

That puts CSL’s year to date gains at roughly 8.88%. That’s not awful, but when you consider the S&P/ASX 200 Index (ASX: XJO) is up around 13.4% for the same period, some shareholders might certainly be a little disappointed.

And when you look at CSL’s performance over the past year, things don’t get much better. CSL is down over the past 12 months by close to 0.3%. By contrast, the ASX 200 has put on a very healthy 16.6% over the same period. In fact, the CSL share price has barely done anything of note since January 2020. Back then, you could buy the same CSL shares for a very similar share price to what’s being asked today.

Now CSL shareholders probably aren’t used to this kind of share price malaise. This was a company that seemed to grow by double-digits every single year before last year, after all. In 2017, CSL shares went up by roughly 40%. In 2018, it was 32% and 2019 saw them appreciate by a whopping 50% or so.

So what’s going on here?

CSL share price has a year to forget, but is it back to the races?

Well, CSL was a company that struggled in the face of the coronavirus pandemic. Its plasma collections business suffered enormously due to global lockdowns while a promising vaccine candidate that CSL developed with the University of Queensland failed to get off the ground.

But that’s the past. So what does the future of the CSL share price look like?

Well, in some good news for investors, one broker has recently upgraded its view on CSL. As my Fool colleague Brendan covered last week, brokers at Macquarie Group Ltd (ASX: MQG) recently upgraded CSL shares to “outperform” from “neutral”, with a 12-month share price target of $338 per share. That implies a potential 12-month upside of close to 10%.

Macquarie believes the headwinds that have been buffeting CSL shares recently are easing. It points to the easing of disruptions in the US plasma collection market and reckons CSL’s new collection platform “may present upside for the group”.

At the current CSL share price of $310.96, this ASX 200 healthcare company has a market capitalisation of $141.6 billion, a price-to-earnings (P/E) ratio of 43.5 and a dividend yield of 0.95%.

The post Lockdowns are easing, but are CSL (ASX:CSL) shares out of the woods yet? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Motley Fool Australia Chief Investment Officer Scott Phillips joined Peter Overton on Nine’s Late News on Sunday night to discuss the big economic week ahead, including RBA minutes, a speech from Governor Lowe, the latest view of wage inflation, and hopes for a bumper Christmas retail season.

The post The week ahead: Interest rates, inflation and wages. Scott Phillips on Nine’s Late News appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Dreadnought Resources Ltd (ASX: DRE) share price was flying high at market open this morning. Dreadnought shares are up 6.82% at the time of writing, after earlier posting gains of more than 18%.

We look at the latest update from the ASX resource explorer that looks to be piquing investor interest.

Exploration update from Dreadnought

The Dreadnought share price is soaring after the company reported positive assay results at its Tarraji-Yampi Project in Western Australia.

The results come from the first 6 mineralised follow-up holes drilled in an area of the project known as Orion. The company is awaiting the assay results of an additional 13 drill holes, including its deepest.

According to the release, results from the 6 assays returned so far confirm Orion as a high-grade resource discovery. Assays returned copper (Cu) grades up to 7.4% and silver (Ag) of up to 192 grams per tonne. Also gold (Au) of up to 34.2 grams per tonne and cobalt grades (Co) of up to 1.66%.

Atop those strong results, the Dreadnought share price could be getting a further boost. The miner reports that the mineralisation commences from 1 metre under cover and extends to at least 240 metres along strike and 150 metres down dip.

The company’s geophysical modelling indicates the mineralised body could extend to at least 500 metres depth.

Dreadnought’s managing director, Dean Tuck, commented on the promising results:

With multiple thick, high-grade intercepts now confirmed we are delighted to declare Orion a high-grade Cu-Ag-Au-Co discovery occurring just 1 metre below surface. With 13 mineralised holes remaining to be assayed, including our deepest, and our oxide and supergene intercepts, we expect more high-grade intercepts to come.

This is an amazing outcome from what is our second ever drill program at Tarraji-Yampi, the first programs here since 1958/1972 and an indication of the potential for this highly prospective and underexplored ground to produce more discoveries.

Dreadnought share price snapshot

The Dreadnought share price has soared 135% in 2021. This well outpaces the 14% year-to-date gains posted by the All Ordinaries Index (ASX: XAO).

Over the past month, Dreadnought shares have gained 27%.

The post The Dreadnought (ASX:DRE) share price soared 18% this morning. Here’s why appeared first on The Motley Fool Australia.

More reading

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• What is inflation? Are Woolworths (ASX:WOW) shares the ‘ultimate inflation hedge’?
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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Inflation is a theme triangulating investor groups amid the latest statistics, which shows inflation rising at its fastest pace in over 10 years.

Data from the Reserve Bank of Australia (RBA) shows the primary measure of inflation, the Consumer Price Index (CPI), rose by almost 1% this quarter, and 3% in the 12 months to September 2021. But more on that later.

Thankfully Australia is faring better than its US counterparts, where inflation rose to 6.2% for the quarter – its highest rate of change in over 25 years.

As such, market participants are now seeking avenues to park their hard earned capital without the looming threat of inflation eating into investment returns.

Here we provide an in-depth understanding of inflation and what it means for investors, given the current narrative.

Plus, find out why Rhett Kessler of Pengana Capital Group reckons shares in Woolworths Group Ltd (ASX: WOW) are an effective hedge against inflation.

What is inflation?

There are two sides to the meaning of inflation. The first is centred around the prices of goods and services in the economy.

In this regard, inflation is defined as the progressive increase in the cost of general goods and services. For Australia, the ‘core’ measure of inflation is the CPI.

The CPI is just a basket of consumer goods and services that tries to mimic purchases of everyday consumers.

It includes things like food staples, fuel prices and clothing, but excludes a whole subset of expenses like energy, for instance.

Consequently, the RBA actually has a whole suite of measures to report the level of inflation in the economy.

For example, other indicators show ‘producer prices’ increasing 1.3% this quarter and export prices gaining 8.5%, whereas ‘food inflation’ is also up 1.3%.

It is also one of the RBA’s roles to maintain inflation within a range of 2–3%, which it defines as a ‘healthy’ increase in prices over time.

Loss of purchasing power

The other facet of inflation is what we call the loss of ‘purchasing power’ of a currency.

Let us explain using a broad example. Let’s assume a hamburger cost $5 in 2018. With inflation at 3% in the next year, the price of our burger is now $5.15.

Imagine that trend continued for the next two years. Now it’s 2021, and we are paying $5.46 for our hamburger.

What happened? Unfortunately, the hamburger isn’t any more delicious or hasn’t come with an extra side of chips.

Obviously, the input costs to our burger went up, due to the cost of goods also rising – a consequence of inflation.

But here’s what many people tend to gloss over. That $5 we had in 2019 – has effectively lost value, because it can’t purchase the same amount of product today as it did two years ago.

In fact, it can only purchase a fraction of the same amount. We now need to pay an additional 9% to get the exact same burger. This is what is meant by a loss in purchasing power.

In fact, The Economist’s Big Mac Index is one interesting way to visualise this. It tracks the cost of a McDonald’s Big Mac burger in each country year to year, to see how different currencies stack up with their purchasing power.

So in short, inflation measures the increase in prices of an economy but also causes the value of a dollar to decrease over time.

What causes inflation?

There are a number of contributing factors that build up inflation, but the premise comes down to the unseen hands of demand and supply.

Simple economics teaches us that when the aggregate demand of a good or service outpaces its supply, prices increase to reflect this dynamic.

The most obvious example of this in recent times has been government induced lockdowns from COVID-19.

Put simply, even though we were sent into global lockdowns, consumers didn’t slow their demand for purchases these past 2 years – it was the supply side that was shut off.

Workers couldn’t even get to their place of work in order to produce the goods consumers wanted to buy.

This has led to significant supply chain and manufacturing bottlenecks in just about every industry in 2021, and prices have shot up across the board in response.

Doesn’t ‘printing money’ cause inflation too?

You might hear the term ‘money printing’ being thrown around – but rest assured, the government isn’t out here churning out $50’s for you and me to line our pockets with.

The term is actually called “quantitative easing (QE)“, and refers to actions taken by the RBA to prop the economy up in frothy times.

Basically, QE is a cocktail of ultra-low interest rates and the RBA flooding the economy with currency reserves (cash, in other words) by purchasing assets, in order to prevent a full-scaled economic blowout. But it doesn’t mean printing more tangible banknotes.

Zimbabwe did just that many years ago and remains the best case example of why we can’t just open up the printing press for currency. At its worst, inflation was over 79.6 billion – yes, billion – percent in 2008, and it once cost over 1 million Zimbabwe dollars just to buy a loaf of bread.

Regardless, the RBA’s actions ensured there was plenty of free cash floating around during our recent spate of lockdowns.

But as Newton said, for every action, there is an equal and opposite reaction.

And the net reaction to all of these actions has been that aggregate demand has significantly outmatched the supply of goods and services in 2021.

Not only that, QE programs have created the perfect environment for asset prices to shoot up – that includes shares and real estate, for example, two distinct out-performers this year.

As such, many experts believe that QE programs around the world have set the stage for a high inflation regime, by allowing demand to outmatch supply, and by driving up asset valuations.

What does inflation mean for investors?

There are many sides to this debate, however, the general consensus is that inflation is a net negative for investors.

Basically, inflation reduces the future value of investment returns, including capital gains and dividend income.

If you expect to receive dividends out in the future, you can also expect inflation to lower the future value (purchasing power) of those dividends as well.

And if inflation is at 3% p.a. for example, one can go ahead and subtract 3% from their overall investment return each year as a result.

However, in the immediate term, inflation can also be good for company earnings – which does bode in well for share prices.

Long-term, however, a level of inflation that exceeds the RBA’s targets of 2–3% is considered a negative for investors. We want to keep our returns and avoid seeing the value of any future returns diminish.

So why then, are some experts looking to shares such as Woolworths Group Ltd (ASX: WOW) to protect against inflation?

A ‘hedge’ against inflation

Rhett Kessler of Pengana Capital was recently quoted on Livewire as stating that Woolworths is “the ultimate inflation hedge. When you’re moving boxes at a gross margin of about 35%, the more boxes you move, the more money you make if there is inflation”.

It is for this reason that Kessler reckons Woolworths is an effective hedge to inflation because it won’t be as materially impacted by prices going up. In fact, it could even be a beneficiary, according to the expert.

For reference, an inflation hedge is simply an asset or a purchase that protects against its eroding impact on investment returns.

Not only that, but supermarkets have traditionally fared well in times of inflation, according to Bloomberg Intelligence. That’s because any raw increase in food prices can be passed directly onto customers, thereby boosting company earnings.

And as Kessler submits, in this situation Woolworths’ would pass the cost on with the same gross margin rate of 35%, creating a compounding effect to the supermarket giant’s earnings profile.

With that in mind, investors may want to start thinking of similar ways to hedge against the effects of inflation and seek similar expert opinions in doing so.

At the time of writing, Woolworths shares have climbed 18% in the past 12 months, well ahead of the inflationary figure of 3%.

Whether it is the ‘ultimate’ inflation hedge is yet to be seen, however, Kessler recommends Woolworths as a buy, and also likes CEO Brad Banducci’s management style to support his case.

The post What is inflation? Are Woolworths (ASX:WOW) shares the ‘ultimate inflation hedge’? appeared first on The Motley Fool Australia.

More reading

• Broker upgrade sends Coles (ASX:COL) share price surging higher
• Why has the Woolworths (ASX:WOW) share price underperformed Coles in the last month?
• Can Woolworths (ASX:WOW) win its delivery battle against Coles?
• What happened to the Woolworths (ASX:WOW) share price in October?
• Here’s why the Woolworths (ASX:WOW) share price is down 5% in a week

The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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