Institutional investors, such as endowments and pension funds and mutual funds, are the main stockholders in this country. Many of them are charged with avoiding companies focused on alcohol, tobacco, firearms, or gambling, for the sake of political correctness. Since institutional demand for these stocks is lower than that for other companies, they historically trade at a lower P/E and pay higher dividends than the stock market at large. There is always money to be made on stocks of companies selling tobacco and alcohol (aka sin stocks). There is no mutual fund I know of focusing on these two segments only; but the Vice Fund (VICEX), which focuses on tobacco, alcohol, defense and gambling stocks, has doubled the return of the S&P 500 in the past five years. I will put morality aside and look at the most-representative sin stocks between tobacco and alcohol subsectors. I chose these five because, in my opinion, their historic risks are known and already-priced in. Nonetheless, two in this analysis, Reynolds and Molson, should still be avoided.
Altria Group, Inc. (MO)
MO is listed on the NYSE, and was trading there recently at a little under $28 per share, very near the top of its 52 week range of from $28.14 to $23.20. It has a market capitalization of about $57 billion, and a trailing P/E of 16.6. It pays an annual dividend of $1.64, for an annual yield of 5.9%.
MO has endured various restructurings in recent years. In no particular order, it spun off Kraft Foods, Inc.(KFT) and Philip Morris International, Inc. (PM) to shareholders and acquired the former U.S. Tobacco. It retains a minority, 29% state in SABMiller, (OTC:SBMRY), one of the leading worldwide beer brewers. It also owns a winery, and a real estate operation.
Its core business, domestic tobacco, has been in decline for over twenty years. To counteract that, MO announced its second $1 billion stock buyback program in the past twelve months, and launched upon a new $400 million dollar cost reduction program after wrapping up a $1.5 billion annual cost reduction program.
Tobacco has long been a highly profitable business. MO's return on equity for the 12 months ending September 30, 2011 was nearly 75%. MO has also increased its dividend for over 40 years in a row, and has plenty of earnings coverage to continue the dividend increases.
Tobacco stocks have the specter of revenue and legal challenges ahead of them. But MO's financial strength and generosity toward shareholders cannot be overlooked. Income and value investors should continue to do well with this name.
Reynolds, America Inc.(RAI)
RAI is listed on the NYSE, and was trading there recently at about $40 per share, near the top of its 52 week range of from $40.42 to $30.94. Its market capitalization is $23.4 billion and its trailing P/E is 17.7. Its current annual dividend is $2.12 per share, for a yield of 5.4%.
In the third quarter of 2011, RAI reported that its revenues declined about 2% from the year earlier period, to $2.2 billion, and its profits fell about 4%, to $367 million, or $0.63 per share. The decline in revenues was due to the declining domestic cigarette market, and the decline in profit was largely due to legal costs of tobacco litigation
Despite the problems outlined above, RAI, had fine returns on equity and sales in the most recent quarter, has increased its dividend aggressively in the last five years, and recently announced a $2.5 billion dollar stock buyback. But since the dividend payment is over 90% of RAI's profits, further dividend increases are not likely for a few years.
I do not see a lot of upside, either growth or income increases, with RAI. I believe the stock should be avoided.
Philip Morris International, Inc. (PM)
PM is listed on the NYSE, and currently trades at a little over $72 per share, near the top of its 52 week range of from $73.46 to $55.85. Its market capitalization is $125.3 billion, and its P/E ratio is 15.3. It currently pays an annual dividend of $3.08, for a yield of 4.3%.
PM was spun off from MO in March, 2008. The two reasons for that spin off is there is growth outside the United States in tobacco sales, and there is less litigation cost. In the third quarter of 2011, PM's revenues increased 22% from the year earlier quarter, and profits increased by over 30% to $1.35 per share.
PM is in the midst of a three year, $12 billion stock buyback. It has aggressively increased its dividend as well, nearly doubling it over the past three years. Combine that generosity with the growth potential of a non-U.S tobacco company, you have what I believe is a classic growth and income stock. Take a look.
Anheuser-Busch InBev SA Sponsor (BUD)
BUD is listed on the NYSE and was trading recently at about $57 per share, near the midpoint of its 52 week range of from $64.53 to $39.05. Its market capitalization is about $91 billion, and its trailing P/E is 18.5. It pays an annual dividend of $0.97, for an annual yield of 1.7%.
BUD was formed when the old AB InBev acquired the old Anheuser-Busch company in November, 2008. BUD is the largest beer maker in the world. In the third quarter of 2011, BUD continued its pattern of late of declining unit sales with increasing profits. It achieves this largely by focusing on its higher margined products, and its overall profit margin is a solid 13%. BUD's third quarter, 2011 profit increased by 16% to $1.73 billion or $1.08 per share. As the former independent companies settle into one worldwide company,it seems that they will find a way to increase sales unit volumes.
BUD is the owner of 7 of the world's 15 leading beer brands. I believe BUD has ample growth potential. Jim Cramer recommends it, and so do I, for those with a multi year time horizon.
Molson Coors Brewing Company (TAP)
TAP is listed on the NYSE, and it was trading there recently at a little under $40 per share, near the low end of its 52 week range of from $51.11 to $37.99. Its market capitalization is about $7.1 billion, and its trailing P/E is 12.1. It pays an annual dividend of $1.28, for a yield of 3.1%.
TAP has had a dismal 2011. In the third quarter, for instance, its profits were down 24% from the year earlier period. Jim Cramer described its stock, as having the worst price chart he had ever seen when he urged the sale of TAP on November 15. But all is not lost. TAP clearly believes in itself, as it just announced a $1.2 billion share buyback.
Clearly, TAP is cheap when compared with BUD (P/E 18.5) or Boston Beer Company, Inc. (SAM) (P/E 22.4), but that is not itself a reason to buy. I would avoid it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.