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Sinful investing is based on investing in companies that provide a good or service considered by most to be immoral or unethical. Gambling, alcohol, tobacco and pornography are the most common types of sin-related industries. Although some argue that defense and oil companies fall under this classification as well, my personal opinion differs. However, I would suggest that fast food corporations can be classified into the sinful category. Despite what intuition might suggest, sinful investing often produces strong returns in the form of capital gains and dividends.
Vice Fund Portfolio Manager Gerald Sullivan argues that investing in vices such as tobacco and alcohol provides protection against systematic risk. When markets are slumping and the economy follows suit, most people will not stop drinking and smoking, but would normally just cut down from purchasing higher-end products to cheaper alternatives. Gambling, on the other hand, typically does move in the same direction as the overall market. The strong attraction toward sinful products is that they have a strong addictive appeal, resulting in a strong demand flow and a reliable consumer base.
The U.S. government states that smoking results in 443,000 yearly deaths and annual medical costs of $96 billion. Regulation cut the prevalence of smoking has indeed hurt big tobacco, but has by no means taken them out of business. Altria Group (NYSE: MO) is up 170% in the last 10 years. Although annual revenues decreased from $73 billion in 2001 to $17 billion in 2010, the company was involved in a number of spinoffs, including Philip Morris International (NYSE: PM) and Miller Brewing Company. Yet, the company continues to generate healthy cash flows, allowing regular distributions to shareholders. While the money market rates hover around 0.5%, Altria pays a hefty dividend of 5.7%, and is trading around its all-time high. Likewise, Philip Morris currently yields 4% and also trades around its all-time high.
Regulation remains the central focus point to determine the success or failure of the tobacco industry. Campaigns to discourage young potential smokers from taking up the habit have been successful and the public is well educated on the detrimental effects of smoking. Most importantly, the ban on cigarette advertising does not permit the industry the same luxuries as other consumer segments. Sales volumes, however, have been compensated with higher product prices.
Alcohol consumption is attributed to approximately 100,000 yearly deaths, including drunk driving, disease and various accidents, and estimates suggest that alcohol-related health care costs amount to $175 billion. Despite these figures, the U.S has a fairly low alcohol consumption rate of only 9.4 litres of pure alcohol per year, the same amount as 470 pints of beer. In comparison, the average Russian drinks three times as much, an annual equivalent of 90 bottles of vodka or 1,350 pints of beer. Molson Brewing Company (NYSE: TAP), Anheuser-Busch InBev (NYSE: BUD) and Boston Beer Company (NYSE: SAM) are among the largest players in the alcoholic beverage space, all of which have stable international operations to capitalize on European consumption trends.
The Boston Beer Company, like Altria Group, is also trading near its all-time high following a strong quarterly release in November. Net revenue increased 8%, mainly driven by a 7% jump on shipment volumes. Unlike tobacco companies, alcohol is not as heavily regulated in terms of advertising restrictions. This popular maker of Sam Adams beers increased its marketing expenditures by 14% to approximately $35 million as the company projects substantial earnings growth largely driven by sales volumes and a favorable state tax treatment.
Investing in sin has one major advantage over other product/service types – the goods and services provided by these corporations have a long history of growing demand. Smoking dates back to around 5,000 BC and gained popularity in the 1800s. Controlled alcohol consumption has been suggested to have gained acceptance in the Neolithic period around 10,000 BC and gained much traction in Egypt in 4,000 BC. With this long period of consumption in human history, it’s no wonder that many people have a disposition toward sinful products.
Motley Fool newsletter services recommend Boston Beer. The Motley Fool owns shares of Altria Group, Philip Morris International, Boston Beer and Molson Coors Brewing Company. apinkasovitch has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.