Buy these high dividend yield cash-flow machines to beat stagflation, Jefferies says

Published Thu, Mar 17 20229:55 AM EDT

With the threat of stagflation looming, Jefferies highlighted stocks with high dividend yields and strong cash flow that could outperform in this environment. Stagflation refers to a situation of persistently high inflation and stagnant economic growth. Inflation is heating up at a pace not seen in decades. The consumer price index for February rose 7.9% from a year ago, the highest level since January 1982. The Fed at its March meeting approved a 0.25 percentage-point rate hike, the first increase since December 2018. Officials indicated an aggressive path ahead, with increases coming at each of the remaining six meetings in 2022 . Some investors worry the rising rate environment could lead to stagflation . Plus, financial markets are contending with war in Ukraine . "The prospects of demand destruction due to higher commodities prices following the geopolitical tensions have increased," Jefferies analysts led by Desh Peramunetilleke said in a Thursday note. "Amid looming stagflationary risk, cashflow and balance sheets are coming into focus." "Cash machines" and quality plays are some of the best performers in stagflationary periods, according to Jefferies' analysis. Plus, amid a shaky market, dividend stocks offer a way for investors to get paid consistently. A dividend is a regular payout of a portion of a company's profits to its shareholders. Here are the criteria Jefferies used to find high-yield, cash-flow winners. Market cap over $10 billion Forward dividend yield of more than 1.5% Top two quintiles on cash-flow factors (low accruals versus peers, high free cash flow margin and high total payout) FCF yield over 2% and positive FCF in at least four of past five years Strong balance sheet (earnings before interest, taxes, depreciation and amortization interest cover over 5x; net debt to EBITDA less than 2x; and net gearing less than 80%) Take a look at 10 names on Jefferies' list. 3M has the highest 12-month forward dividend yield on the list at 4.1%. The name also scores in the top quintile of cash-flow factors. ConocoPhillips is a top performer this year as the energy company has benefited from elevated oil prices. Shares are up 35% in 2022. The 12-month forward dividend yield for ConocoPhillips is 2.2%. Best Buy is another name on Jefferies' list. Shares rose earlier this month after the company reported earnings, with executives offering sunny forward guidance. Best Buy has a 3.0% 12-month forward dividend yield. Other stocks highlighted by Jefferies are Pfizer , Cisco Systems and Procter & Gamble . —CNBC's Michael Bloom contributed to this report.

A shopper exits a Best Buy store during Black Friday sales in Brooklyn, New York, November 26, 2021.

Brendan McDermid | Reuters

With the threat of stagflation looming, Jefferies highlighted stocks with high dividend yields and strong cash flow that could outperform in this environment.