It's a Great Time of Year to Consider Sin Stocks

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With St. Patrick’s Day in the rear-view mirror and Cinco de Mayo just around the corner, it’s entirely appropriate to evaluate some of the market’s "sin stocks."

These are companies whose product offerings are considered bad for our health. Sin stocks often suffer scrutiny from more socially conscious investors. But as far as investor returns are concerned, many of these stocks are great performers, both recently and over time. Companies that operate in the alcohol industry 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 dividends and share repurchases.

Bottom’s up!

Diageo (NYSE: DEO) is a $76 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 recently or will soon enjoy. 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% and almost 22% growth of operating profit in 2012. The company pays a dividend to shareholders of more than 2% and its stock returned more than 30% 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 much smaller large-cap stock, with a market value of more than $14 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 25 times trailing earnings. But the stock offers a dividend of almost 2% and reported 2012 growth of sales and underlying operating income of 9% each. In addition, recently the company provided investors a dividend increase of almost 9.5%. 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 $68 per share.

Anheuser-Busch InBev (NYSE: BUD) offers the juggernaut Budweiser brand, among others. In a widely publicized merger, Anheuser-Busch was taken over by Belgian-based InBev in 2008 for $52 billion. The merger activity didn’t stop there: last year the newly combined entity acquired the remaining portion of Groupo Modelo, maker of Corona, for $20.1 billion. AB-InBev now has a massive portfolio of approximately 200 beer brands, including Stella Artois, Becks, and Michelob, in addition to Budweiser and Corona. The newly formed beer giant now operates in 24 countries and employs 190,000 people worldwide.

AB-InBev offers investors a divided yield of slightly less than 2% at current prices. The company reported 2012 sales inched up about 2%, although earnings from operations increased more than 3.27% year over year. AB-InBev was able to realize increased profit growth as a result of lowered expenses. The company’s profit margin increased two percentage points versus the prior year. The stock’s performance last year was incredibly impressive, rising more than 45%. After last year’s rally, the stock now carries a $154 billion market value and a trailing price-to-earnings ratio in the high teens.

Saintly returns from sin stocks

Each of these three stocks engaged in the alcohol industry has provided investors with solid operating performance and even better stock price performance over the past few years. Sin stocks such as these provide reliable operating cash flows, and dependable (if unspectacular) sales growth.

None of these stocks appears to be a screaming bargain, but they offer a measure of safety in their world-class brands. Furthermore, demand for alcohol is relatively inelastic, meaning these producers can charge increasing prices without incurring a measurable loss in revenues, adding another layer of safety to the investing merits of these three great sin stocks.

As the calendar turns toward spring and summer, there are many events in which discerning adults will likely enjoy a few of the products that these companies offer. For investors equally interested in enjoying stocks that reward them with compelling growth, dividends, and share buybacks, these stocks should be on your watch list.


Robert Ciura has no position in any stocks mentioned. 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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