The earnings season is still in its early phases. We’ve already seen the very real effects of inflation spread through the income statements, devastating profit margins on both small and large businesses alike.

Investors may consider firms that have exposure to commodities that are causing inflation in the first place. Caterpillar and Freeport-McMoRan are two dividend stocks that might be worth taking a look right now.

Caterpillar paints a bad outlook of the global economy 

Following disappointing first-quarter results, the stock prices of Caterpillar are falling. In Q1 2022, revenue in Caterpillar’s energy and transportation sector grew by less than 10% versus Q1 2021, which is a disappointment given the strength of the oil and gas industry. However, its resources business, which includes mining and oil and gas extraction, grew by 30% year over year owing to a stunning 55% increase in North America sales and a 33% rise in Asia/Pacific income. The profit margin for the resources sector fell by 1.5 percentage points, but overall segment profits increased 16%.

Expectations for long-term demand growth, coupled with price hikes, will outweigh the costs of inflation and supply chain difficulties. Caterpillar has so far been technically correct, as sales increased by 14% and earnings per share by 3%. When investors see a company’s revenue expand at a faster rate than profit while profit margins deteriorate in every business segment, that’s usually an indication that costs are increasing. In the industrial sector, there’s always pressure on margin. And Caterpillar just gave us a clear indicator that it might get much worse from here.

Caterpillar’s backlog increased by $3.4 billion in the first quarter of 2022, compared to the fourth quarter of 2021 and by $9.7 billion over the past year, suggesting that demand is outpacing the company’s capacity to produce and ship items. In this light, Caterpillar appears to be an inflation-resistant stock worth considering right now. Inflation may temper Caterpillar’s growth potential. However, in a marketplace where many businesses are reporting lagging sales and demand prospects, Caterpillar appears to be in a better position. Furthermore, Caterpillar is a Dividend Aristocrat that has paid and increased its dividend for 27 years in a row, which provides an income stream to patient investors.

Copper’s underlying sturdy demand trends help to give it a bright outlook.

Copper miner Freeport-McMoRan’s stock has tumbled nearly 20% since its dismal earnings announcement on April 21. Still, it’s difficult not to consider the sell-off to be excessively excessive. The difficulty wasn’t so much in the first quarter earnings as it was in management lowering 2022 and 2023 sales volume targets and raising 2025 net cash cost of copper expectations.

However, some context is required. A reduction of nearly 20% in market value, or $13.7 billion, doesn’t make sense for a firm cutting its sales volume forecast by 100 million pounds of copper from 8.8 billion pounds of copper over 2022 and 2023. In addition, the decrease in sales volume forecasts (mainly owing to an increase in COVID-19 cases early in 2022), as well as the rise in unit net cash cost estimates, are caused by factors like growing energy costs and other raw materials prices that may turn out to be short-term.

Copper’s demand is further bolstered by its application in electric automobiles (wiring, batteries, and charging networks), renewable energy (storage and transmission), and the general shift toward electrification in the economy. These are all trends that aren’t going to go away anytime soon.

If the economy keeps expanding, consumers will continue to demand copper, and Freeport-McMoRan will benefit.

Author: Scott Dowdy

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