Sin Stocks: Winners in Both Strong and Weak Economies

 |  Includes: ABEV, DEO, MO, PM, SAM
by: Nicholas Pardini

Smoking and drinking alcohol are the not the best things to do for your health. However, companies that produce these products can be healthy for your portfolio. With high dividend yields, growth in emerging markets that have a rising amount of people can afford to partake in these vices, and the addicting nature of their products, I expect sin stocks to continue to outperform the market. Unless if you have ethical reasons against investing in these types of companies, here is a list of a few leaders in the industry I recommend buying.

Diageo (NYSE:DEO)- Diageo is one the world's leading producers in hard liquors. Brands that they manufacture include Smirnoff, Johnnie Walker, Guinness Beer, Red Stripe, Captian Morgan rum, Jose Cuervo and other popular alcohol brands. They also produce a variety of wines, making them the most diversified of the alcohol companies on this list. They pay out a high dividend yield of 3% and a return of equity of over 40%. However, the concerns with Diageo is high debt load and that technical indicators point out that it is slightly overbought.

Phillip Morris International (NYSE:PM)- Phillip Morris as I mentioned in a previous article, is one of the best growth stories in the consumer staples sector. It pays out a high yield of nearly 4% and controls 15.6% of the world tobacco market. Since the split with Altria Group, Phillip Morris now focuses solely on the growth in emerging markets and Europe which both show a greater affinity for smoking than the U.S.

Ambev (ABV)- Ambev is the leading beer producer in Brazil and Anheuser Busch Imbev's Latin American division. They produce the two most popular beer brands in Brazil and will soon be introducing the Budweiser brand to Brazil. They also distribute non-alcoholic Pepsi products throughout South America. Financially the company is sound with little debt, a 24% return on investment capital, and 2.26% dividend yield. Overall, Ambev is a relatively safe way to invest in the growth of Brazil and the emergence of their consumer society.

Altria Group (NYSE:MO)- Altria, like its sister company is the leading producer of cigarettes in its market. However its market is the US whose government and culture is pretty adversarial towards smoking. Nevertheless, smoking rates have stabilized at 20% of the U.S. population after over fifty years of decline. To make up for the lack of growth Altria has been able grow through raising prices in a very inelastic market. It also pays a 5.6% yield.

Boston Brewing Company (NYSE:SAM)- The Boston Brewing Company is one of the fastest growing publicly traded beer companies in the U.S. The company still has solid earnings growth at over 11%, no debt, and a 25% return on investment. After a recent pullback technical signals indicate the company is severely oversold which makes the current price a good entry point. Unfortunately, this company is the only "sin stock" on this list that does not pay a dividend.

Overall, buying any of these five stocks will provide a company with stable earnings, high yields, and solid growth internationally. Even if we see a double dip recession in the US or Europe, consumers are much more likely cut back at other goods before kicking a smoking habit or a beer after work. Any of these stocks are good for a long term investor who can achieve moderate growth while maintaining a decent yield (especially compared to the current state of the bond market).

Disclosure: I am long PM, ABV.