Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24
Banxe Reviews: Revolutionising Financial Transactions with Innovative Solutions - 3rd May 24
MRNA - The beginning of the end of cancer? - 3rd May 24
The Future of Gaming: What's Coming Next? - 3rd May 24
What is A Split Capital Investment Trust? - 3rd May 24
AI Tech Stocks Earnings Season Stock Market Correction Opportunities - 29th Apr 24
The Federal Reserve's $34.5 Trillion Problem - 29th Apr 24
Inflation Still Runs Hot, Gold and Silver Prices Stabilize - 29th Apr 24
GOLD, OIL and WHEAT STOCKS - 29th Apr 24
Is Bitcoin Still an Asymmetric Opportunity? - 29th Apr 24
AI Tech Stocks Earnings Season Opportunities - 28th Apr 24
S&P Stock Market Detailed Trend Forecast Into End 2024 - 25th Apr 24
US Presidential Election Year Equity Performance in the Presence of an Inverted Yield Curve- 25th Apr 24
Stock Market "Bullish Buzz" Reaches Highest Level in 53 Years - 25th Apr 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Whiskey and Cigarettes: The Best Way to Profit From Sin Stocks

Companies / Investing 2012 Feb 13, 2012 - 06:49 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleJason Simpkins writes: The common misconception is that so-called "sin stocks" only perform well when the economy tanks.

But the truth is that purveyors of alcohol and tobacco take their lumps during a recession just like everybody else.

That was certainly true of the world's largest spirits company Diageo PLC (NYSE: DEO), which traded as low as $42 a share in 2008. Of course, the stock has more than doubled since then, closing Friday at $93.38.

Shares of cigarette-maker Philip Morris International Inc. (NYSE: PM) have nearly doubled in the past two years, as well.

Still, you don't have to worry if you missed either of those rallies because there's still plenty of room for these two sin stocks to run.

Indeed, more and more consumers are returning to their vices as the global economy improves.

For instance, liquor sales, which stagnated in 2009, rose 4% last year, while sales of top shelf spirits increased 5.3% -- a near return to pre-2008 levels.

What's more is that these gains came at the expense of the beer market, which typically has the upper hand in tough economic times.

"People who are doing well are going out and spending on spirits as an affordable luxury," John McDonnell, chief operating officer for The Patron Spirits Co. and chairman-elect of the Spirits Council, told Bloomberg. "Also, spirits companies never stopped spending through the downturn."

The same goes for tobacco products, which have been gathering steam in emerging markets even while they fall out of fashion in developed countries like the United States.

So let's take a closer look.

Diageo is Uplifting Spirits
Diageo - the company behind Baileys, Captain Morgan, Guinness, Smirnoff, and Johnnie Walker - is the most obvious beneficiary of increased liquor sales.

These are powerful brands that helped Diageo actually increase its cash flow during the recession. And now that consumers worldwide are in a slightly more festive mood, sales are set to take off.

Diageo, which produces about 28% of the spirits sold in the United States, reported a 5% increase in liquor sales in the U.S. and Canada in the second half of 2011.

More importantly, the company continued to expand its business in emerging markets.

While volumes were flat in North America and Europe, Diageo generated 14% volume growth in Latin America, 7% in Africa, and 5% in the Asia-Pacific region.

And that's just the beginning for a company that has made developing markets the focus of its growth strategy.

Diageo increased its marketing spending by 10% to 15.8% of sales in the second half of 2011. And nearly 75% of that increased spending was devoted to emerging markets.

Additionally, the company has taken steps to increase its beer business in the fledgling African market by making some shrewd acquisitions.

In November, Diageo invested $211 million (134 million pounds) for a 20% stake in SABMiller's (PINK: SBMRY) Kenya Breweries. And just last month, the company acquired Meta Abo Brewery in Ethiopia for $228 million (145 million pounds).

Diageo believes Ethiopia's beer market will grow more than 10% annually through 2015. And with its takeover of Meta, the company will command 50% of that market.

This growth potential has clearly been factored into Diageo's share price which is up more than 6% over the past month and 22% in the past year.

The stock is currently trading at roughly 17-times fiscal 2012 earnings and yields nearly 3%.

Phillip Morris Smokes the Competition
Liquor companies like Diageo aren't the only ones toasting success these days, either.

Cigarette companies like Philip Morris, Reynolds American Inc. (NYSE: RAI), and Lorillard Inc. (NYSE: LO) have been posting some impressive numbers, as well.

Reynolds, the nation's second-biggest tobacco company, just reported a 16% jump in fourth-quarter profit. And Lorillard, which dominates the market for menthol cigarettes, saw its fourth-quarter profit surge 20%.

Still, tax hikes, smoking bans, health concerns, and social stigma will continue to make life difficult for these companies - especially in the United States.

For that reason Philip Morris International (PMI) may be the best bet for investors.

True to its name PMI has a strong global presence, particularly in Asia. The company said its shipments grew less than 1% to 226.6 billion cigarettes in the fourth quarter, only because a 10.5% in Asia offset declines of about 7% in Europe, Latin America, and Canada.

PMI bolstered its Pacific Rim presence in February 2010 by buying the Philippines' Fortune Tobacco Co. That merger gave PMI 90% of the Filipino market. Meanwhile, the company has broadened its market share in Korea and Indonesia to about 20% and 30% respectively.

In total, PMI holds a 27.6% share of the cigarette market outside of the U.S. and China, with a brand portfolio that includes 15 of the top international brands, including Marlboro.

The company earned $8.59 billion, or $4.85 per share, in 2011 compared with $7.26 billion, or $3.92 per share, in 2010. Revenue excluding excise taxes increased about 14% to $31.1 billion. Its shipments were up nearly 2% to 915.3 billion cigarettes.

Better still, the company's share price has been bolstered by share buybacks and dividend increases.

In fiscal 2011, PMI spent $5.4 billion to repurchase 80.5 million shares of its own common stock. The company plans share repurchases of approximately $6 billion in fiscal 2012.

PMI also has a strong history of dividend increases.

The company hiked its dividend by 20.3% last year to $0.77, representing an annualized rate of $3.08 per common share. There's a good chance the payout will be raised again this year, as well.

So when it comes to sin stocks Philip Morris International and Diageo clearly have an edge over the competition.


Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in