Tobacco, Beer, and Fast Food Are How to Retire

By Michael Carter - August 28, 2012 | Tickers: MO, BUD, MCD, PM | 0 Comments

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Many new investors seem to over-complicate the stock market when they first enter it.  They either try to hit a home run with some obscure company that has little background information.  Or, they will find a stock that has all this promising potential, but carries a ratio of way too much risk for not much reward.  Others really don’t know where to begin and may not be sure how to connect what they see and hear in everyday life with what is ok to actually buy in the stock market.  In my opinion, tobacco, beer, and fast food are how to retire; or at least great starts to a portfolio that leads to retirement.  By retirement, I don’t mean going out and getting a box of cigars, a 6 pack, and a few hamburgers and fries.  What I mean is to enter the market with strong, long-term, and consistent buys in the sectors of tobacco, beer, and fast food.

Tobacco

Tobacco was the first crop grown for money in North America.  In 1612, the settlers of the first American colony in Jamestown, Virginia grew tobacco as a cash crop becoming their main source of money. 

Above is the 5 year % chart for both Altria Group (NYSE: MO) in blue (+65%), and Philip Morris International (NYSE: PM) in red (+86%).  You can see they both follow a similar pattern when they fall and when they soar.  Philip Morris was an operating company of Altria Group for a long time until it was spun off in March of 2008 in the Philip Morris IPO.  They are separate stocks today, but Altria still owns some of Philip Morris’ brands.  Both offer you either the US market (MO) or the Global market (PM) and each have their strengths and weaknesses. 

What makes MO or PM so great is that their product is seriously addicting, it is easily found everywhere, and even with rising costs due to higher taxes and the countless lawsuits, the sector has great longevity of consistent returns.  MO in particular is rare because it offers an above average dividend yield for income investors (4.7%) and it continues to increase the yield over time.  Using the latest data, smoking rates in the United States have dropped by about half among adults from 42% in 1965 to 20.8% in 2006.  However, due to the rising population (194 million in 1965 to nearly 300 million in 2006), the overall number of smokers hasn’t changed much.  In 1965, there were about 50.1 million smokers.  In 2006, there were 45.3 million smokers.  Add this up with the rising prices of cigarettes and other tobacco products, and you have a recipe for success when it comes to tobacco stocks.

Beer

Ale is one of the oldest beverages humans have ever produced dating back to BC and chemical tests on old fossils have shown it was produced at least 7000 years ago.  If this isn’t enough proof that beer is a great investment and won’t be disappearing anytime soon, Anheuser-Busch (NYSE: BUD) could convince you.

Above is the 5 year share price chart for BUD.  In the past 5 years, the price has increased over 65%, not including its annual ~1.9% dividends.  Still not convinced?  BUD is the world’s largest brewer with nearly 25% global market share and a 49.2% share in the US alone.  Their portfolio consists of over 200 brands and the odds are that you have bought some of BUD’s products at some point in your life.  Instead of throwing your money down the drain – literally, how about getting into the market with some beer in your own portfolio?  The past 4 quarters, BUD has beaten estimates to the upside by 10.10%, 31.5%, 15.4%, and 9.9%, respectively.  In 2011, BUD’s net income to common shares was $7.959 billion and in 2012, they are expected to exceed that number.

Fast Food

White Castle in Wichita, Kansas is commonly credited with being the first fast food restaurant in 1921.  But to be honest, people have always wanted to eat and they have always wanted to have their food fast. 

Above is the 5 year share price chart for McDonald’s (NYSE: MCD).  When it comes to fast food, you need to be aware that there is significantly more competition.  Whereas, tobacco stocks like MO or PM and beer stocks like BUD have a significant market share and the next competitor is somewhere in left field, fast food competes with not only the hundreds of other fast food companies, but with thousands of restaurants and grocery stores.  People will always smoke and drink.  Even those with little to no money will find a way to spend what they can get on cigarettes or alcoholic beverages. 

McDonald’s recently reported flat sales in the 2^nd quarter of 2012 and actually missed expectations which are a rarity for the monster fast food chain.  Don’t let this sway you though.  Sales actually improved by less than 1% from the same period a year ago to $6.92 billion.  I can think of over a hundred companies that wished their biggest problem was improving sales less than 1% year over year.  What I like about MCD is that they are able to adapt to change given their history to overcome obstacles.  They have made changes to the menu, improved the overall brand, modernized their restaurant designs both inside and out, and continue to expand globally.  What I particularly like, that goes well with the theme of this article, is that they have increased shareholder dividends for 25 consecutive years.

Triple Play

In closing, the stocks mentioned should help the new or experienced investor in creating a better retirement plan.  All 3 sectors provide stocks with solid dividends, great earnings growth, and products that are long-lasting despite whatever is happening in the economy.  After all, it is always great to leave work and see the designated smoking area full, the local McDonald’s drive-thru backed up around the building, and to see the neighborhood bar stocking on beer for the weekend.

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