The Wages of Sin are Death
The Old Testament Romans quote made it clear that a life of sin equaled death, and presumably, eternal damnation. But does that same admonition apply to investors in so called "sin stocks?" Does the mere investment in such companies create such an immoral entanglement that the dire consequences claimed in Romans (and elsewhere) is nonetheless a significant risk? On the other hand, perhaps the opposite is true - these stocks can be a big plus for a diversified portfolio. An objective analysis, devoid of any moral qualification, is appropriate and the reader can make his or her own decision as to whether or not morality enters the equation.
The "sin stocks" can basically be divided into four types of businesses: Alcohol, Tobacco, Gambling and War.
While there are a number of entities that manufacture and sell alcohol, this article will address two of the largest and most diversified, Anheuser-Busch InBev (BUD) and Diageo plc (DEO), and smaller distiller Beam Inc. (BEAM)
As the name would suggest, BUD produces Budweiser beer. Additional major brands include Michelob, Stella Artois and Beck's Beer as well as numerous others. BUD has a current price of $74/share with a P/E of 18 and a yield of 1.8%. Over the last five years BUD has dropped in price from $80 to $18 in the Spring of 2009 and risen again to its current price.
Diageo plc is the massive British spirits company that sells some of the world's best known brands - Johnnie Walker Scotch, Smirnoff Vodka, Crown Royal Whiskey, Captain Morgan's Rum, Jose Cuervo Tequila and Tanqueray Gin, as well as several others. At a current price per share of $101, a P/E of 24 and a yield of 2.1% DEO has a 63 Billion market cap. Over the last 5 years, it has risen from 80-100, although it hit lows of approximately $40/share in the Spring of 2009.
Beam Inc. is the smaller producer of distilled spirits concentrating in whiskey and bourbon with brands including the Jim Beam family, Maker's Mark, Knob Creek, Basil Haydens and a few more. With a market cap of 9 Billion, it holds a current price of $61/share with a P/E of 10 and a yield of 1.3%. Five years ago it's price was around $80/share and reached a low of around $18 in the Spring of 09, at which time it began its climb back to its current price of $61.
The clear kings of the tobacco industry are Altria (MO) and Phillip Morris (PM). Along with Kraft Foods (KFT) these three were originally part of a larger Phillip Morris, otherwise known as "Big MO." In 2003, Phillip Morris changed its name to Altria. In 2007 Altria spun off Kraft Foods. A year later in 2008, Altria split into the domestic (U.S.) tobacco company - Altria, and foreign tobacco company - Phillip Morris.
Whether called Phillip Morris, Big Mo, or Altria, the stock has always paid a healthy dividend of 4%-5%. In the last three years, Altria has appreciated almost 100% from roughly $18/share to $34/share. The foreign tobacco company, Phillip Morris has also done very well in the last three years. From prices of $48/share in June 2009 to a current price of $87, PM has appreciated approximately 80% during this period, while paying a current dividend of 3.5%. Very impressive.
When we think of gambling stocks we typically think of casinos - MGM Grand (MGM), Wynn Resorts (WYNN), Las Vegas Sands (LVS). These three, along with Caeser's Entertainment Corporation (CZR), control the majority of casinos in North America and a few in China. With the downturn in the economy in 2008, MGM and CZR have not done well, either remaining relatively flat or declining.
On the other hand Wynn Resorts and Las Vegas Sands have done very well, thanks primarily their casinos in China. LVS also has interests in Singapore. In the past three years (from June 2009 to June 2012), Wynn has risen from approximately $40 to $100/share, quite an impressive jump, while Las Vegas Sands has done similarly well, more than doubling from $18/share to $40.
With defense spending a significant part of the U.S. economy, as well as the economy of a number of other industrialized nations, the companies that manufacture the products of war fit nicely into the category of sin stocks. Major players in this area include Lockheed Martin (LMT), Raytheon (RTN), and Northrop Grumman (NOC).
Lockheed Martin has increased from $60/share in early 2009 to its current price of $87 today, although the bottom of $60 occurred only a few weeks after prices in the $70s at the beginning of 2009. So unless you had timed it perfectly, a three year investment in LMT would have resulted in more moderate gains. LMT did, however pay a dividend in the range of 4.5%.
Raytheon began to rise in the Spring of 2009 at a price of $35 and has risen to a current price of $56, while paying a dividend of 3.5%.
Finally, Northrop Grumman increased in the last three years from roughly $40/share to its current price of $63. With a steady dividend of 3.4% NOC produced sound results during this period, although like LMT, it hit a bottom near the beginning of 2009.
While it appears that the majority of the major sin stocks reviewed produced positive results, particularly when considering the total return by including dividends paid, the major domestic casinos were a notable exception. The stocks reviewed are certainly not an exhaustive list in the four categories, and I certainly do not suggest that there are not other "sins" out there that could be the source of investment. Finally, for those that might be interested in establishing a position in the "sin arena," perhaps a specialized mutual fund would be in order. Vice Investor VICEX attempts to take advantage of the appreciation sinful issues.
Disclosure: I am long (MO). Also long PM and DEO