3 Sin Stocks for Saintly Returns

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Companies that sell products considered bad for our health are often referred to as ‘sin’ stocks.  These companies suffer scrutiny from more socially-conscious investors.  But as far as investor returns are concerned, many of these stocks are great performers.  Companies that operate in the tobacco and alcohol industries won’t earn public praise any time soon.  What they will earn, however, are reliable cash flows.  These cash flows are then usually turned back over to shareholders in the form of fat dividends and big share repurchases.

Drink Up on Alcohol Stocks

Diageo (NYSE: DEO) is a $72 billion UK-based distiller of alcoholic beverages that are distributed all over the world.  The company has a huge product portfolio of well-known brands that many investors may have enjoyed celebrating the New Year’s holiday.  These brands include Johnnie Walker Scotch, Crown Royal Canadian whisky, Bushmills Irish whiskey, Smirnoff and Ketel One vodkas, Captain Morgan rum, Jose Cuervo tequila, Tanqueray gin, and Guinness stout.  Diageo has an extremely long and proud history dating back to 1886. 

Diageo reported an increase in net sales of over 8 percent and almost 22 percent growth of operating profit in 2012. The company pays a great dividend to shareholders of nearly 3 percent and its stock returned more than 30 percent to investors in 2012.

Brown-Forman (NYSE: BF-B) also makes and sells alcohol, but is a United States-based company.  Brown-Forman is a smaller large-cap stock, with a market value of more than $13 billion.  The company is most well-known for its flagship Jack Daniels brand of whiskey.  Brown-Forman has an equally impressive operating history, as it was founded in 1870.

Brown-Forman isn’t a screaming value at 23 times trailing earnings.  But the stock offers a dividend of almost 2 percent and reported 2012 growth of sales and underlying operating income of 9 percent each.  In addition, recently the company provided investors a dividend increase of almost 9.5 percent.  The stock price performed well in 2012, beginning the year at roughly $53 per share and rising all the way to $70 before settling at its current level of around $63 per share.

One Tobacco Stock for Smoking Returns

Philip Morris (NYSE: PM) sells tobacco under its namesake cigarette brand.  The company was spun off from former parent Altria Group in 2008 so that the international component could operate free of the legal and regulatory scrutiny of the U.S. tobacco market.  Since the spin-off, Philip Morris International has provided tremendous wealth creation to shareholders.  The dividend has been raised 5 times to its current level of $3.40 per share, providing investors with a nearly 4 percent yield at its recent stock price.  The company’s share price has increased from $50 to roughly $86 since 2008.

Operating performance at Philip Morris International has been equally impressive.  Adjusted operating earnings per share increased to $4.88 per share in 2011, representing growth of more than 26 percent.  Free cash flow grew by more than 5 percent year over year, excluding currency fluctuations.  Moreover, cigarette volumes actually increased 1.4 percent, a marked contrast to the declining cigarette volumes in the United States.

The Case for Sin Stocks

For investors who can stomach the less-than-stellar reputations of alcohol and tobacco companies, the financial rewards are clearly evident.  Stocks that appeal to our vices can be fantastic investments, through tremendous cash flow generation and generous policies of returning that cash flow to shareholders.  Each of these stocks will grow sales and earnings per share as a result of premier brands sold across the globe, and each has proven to be extremely shareholder-friendly.  Diageo, Brown-Forman, and Philip Morris International will keep paying and raising dividends on an annual basis and continue to buy back shares to create shareholder wealth.


Robert Ciura owns shares of Altria Group. The Motley Fool recommends Diageo plc (ADR). 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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