Inflation is surging. According to the latest figures, it has exceeded 6% year-on-year. And the Bank of England expects the figures to get worse. Economists at the central bank believe inflation could hit double digits later this year.
Against this backdrop, I think BT (LSE: BT.A) shares look attractive, and today I am going to explain why.
Inflation protection from BT shares
It is never possible to hedge against rising prices entirely, but one of the best ways to navigate an inflationary environment is to own hard and tangible assets. These are assets like property and infrastructure. As prices rise, the cost of replacing these assets also increases, which essentially means they become worth more.
Telecommunications companies like BT rely heavily on infrastructure assets. The corporation owns tens of billions of pounds of infrastructure assets around the UK, many of which would be very challenging to replace. This is the main reason why I believe the BT share price could provide an excellent hedge against inflation.
The company can also increase the price it charges to consumers in line with rising costs. Indeed, that is just what the business is doing this year.
As many consumers are tied into long-term contracts, with inflation uplift written into the terms, the company does have a lot of flexibility in the current economic environment. So BT should benefit from both rising asset prices and rising income as inflation jumps.
That being said, the company is not immune from rising prices altogether. It will have to pay out more in wages as it is likely many of its workers are also on inflation-linked contracts. The cost of servicing and maintaining equipment will also grow.
Some of these additional costs will be offset by higher prices charged to consumers.
But the telecommunications industry is incredibly competitive. There is no guarantee that customers will stay with the business if it puts up prices. If they can leave to a cheaper competitor, they may do at a moment’s notice.
I can see that several providers offer a much cheaper service than BT. This could become an issue for the corporation if it hikes prices too far too fast.
Rising costs across the group and the competitive environment are two factors I will be keeping an eye on as we advance.
The bottom line
Despite these risks, I think the BT share price is one of the best ways to protect my portfolio against inflation pressures. As such, I would buy the stock for my portfolio today.
It also offers a dividend yield of around 4.5%, at the time of writing. And this payout could increase in the years ahead as the company pushes forward with its transformation programme to reduce cost and increase profitability.
The post Why I’d buy BT shares to protect against inflation appeared first on The Motley Fool UK.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.