Inflation Affects Businesses Worldwide
PNC (NYSE: PNC) is a financial services company that offers a wide range of solutions to match the needs of individuals, small businesses, and larger corporations.
Since PNC is exposed to financial products and services, they have undoubtedly seen the effects of inflation like many businesses across North America. However as we’ll break down, later on, the effects on PNC’s business model might be not so significant because of some major leading advantages.
What inflation are we looking at currently?
Understanding Inflation
Currently, inflation sits at 5.4% according to the Consumer Price Index (CPI) which averages out the price fluctuations of consumer goods. There is also the Personal Consumption Expenditures (PCE) index which measures consumer spending over a specific period. This currently stands at 4% as well. (Other Sources)
This is incredibly high compared to historical records of price magnification. This was all after a full year of slowed-down operations across the world in 2020, then fast ramp-ups across production lines.
Inflation affects individuals and businesses that don’t invest their income into assets. This is primarily because the interest rate is so low for savings accounts that you’d theoretically be losing money right now by not putting your cash to work.
Low-interest rates tied with high inflation are incredibly impactful on asset prices and consumer goods, this has been shown over the past year as prices have soared across the board. It’s estimated that the current rates will lower over time, but just in case of significant rising in the current rate, it’s always best to remain prepared.
So, how is PNC positioned to take advantage of these economic conditions?
The Advantages
First off, let’s start by understanding what PNC offers and why this is an inflation-resistant business model.
PNC offers retail banking and asset management services which are always in demand regardless of economic conditions. This allows customers to save and invest throughout PNC’s ecosystem of platforms allowing high optimization while obtaining subtle fees across the client’s products and services.
As of now, PNC currently has 9 million customers. These customers include individuals and small businesses which utilize their deposit, lending, and investment services.
A large list of corporate clients is also included, such as more than two-thirds of the corporations in the Fortune 500, and thousands more in various industries. They all benefit from PNC services.
This should illustrate that no matter how high inflation may be, there will most likely be not much of a fundamental difference in PNC’s balance sheet as long as the client list is maintained, or even better, expanded upon.
The Hedge
As previously stated, inflation can be hedged against. There are various ways to do so like investing in stocks, real estate, precious metals, and even cryptocurrency. However, stocks are the most liquid asset class out of all of them. Stocks have also typically outperformed inflation over the long term.
Although inflation may not continue on its an accelerated trajectory, it’s still crucially important to protect yourself against uncertainty. Luckily, there are many stocks to choose from that can assist in these environments. It all comes down to preference.
Dividend stocks tend to be the most favored while surrounded by uncertainty, which by the way, PNC does bring a nice dividend while also having a business model that can stand in these climates.
Overall, despite higher inflation than on average, PNC can operate the business just as well as before. There are many ways to hedge against inflation, in PNC’s case it’s their client list. In an individual’s experience, this may be holding productive assets in the portfolio. There are so many options to choose from.
Closing Thoughts
PNC should do well in any economic condition, as consumer prices continue to surge from inflation this will create a demand for more credit and increasing interest rates. Both have a positive effect on lenders which a large part of PNC’s business model. In the past 5 year up until this date PNC has enjoyed and 123% ROI 80% from this year alone. This stock has already surpassed its pre-pandemic highs.
If one had access to a lot of capital I would employ my favorite options strategy and sell cash secured puts to generate some upfront income and potentially get in at a better price if prices fall. But if I do not have access to a large some of capital for that strategy I would employ a put spread credit strategy. Still be able to collect income upfront and still be able to be exposed to slight movements in the share price if I am neutral to bullish on this stock.
This is not intended to be investment advice. As always do your own due diligence and invest based upon your own risk appetite and consult your own financial advisor for the right investment strategy for your specific needs.
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