“Sin stocks” have enriched many shareholders over the years, and they still seem to be sizzling.
They are companies in the alcohol, tobacco and gaming industries that sell products or services which are generally deemed unsavory or bad for one’s health.
These big companies have enriched shareholders for long periods of time because their industries ̶ particularly tobacco and alcohol ̶ are highly lucrative businesses.
The businesses generate an unholy amount of cash flow and benefit from economies of scale thanks to their distribution capabilities, and enjoy low capital expenditures. This typically results in high levels of free cash flow, which is largely returned to investors through hefty dividends and share buybacks.
We’ve tallied three of the best sin stocks money can buy, and what do you know? The three sin stocks are related to are tobacco and alcohol. They are giant Altria Group (NYSE: MO), and adult beverage companies Diageo (NYSE: DEO) and Brown-Forman (NYSE: BF-B). These winners feature profits and dividends aplenty.
Sin Stocks: Altria (NYSE: MO)
Altria is one of the most legendary dividend stocks of all time. Altria manufactures the Marlboro cigarette brand in the U.S., but it has a diversified business including smokeless tobacco brands Copenhagen and Skoal, a wine business under the Ste. Michelle Wine Estates brand, and it also has a significant stake in brewer SAB Miller (OTC: SBMRY).
Last year, Altria generated $5.58 billion of free cash flow. Because it generates such strong free cash flow, the company is committed to returning 80% of its adjusted earnings every year as a dividend.
Altria has grown its dividend 49 times in the past 46 years. Altria currently pays an annualized dividend of $2.28 per share, which amounts to a hefty 3.3% yield based on its current share price.
Altria is on fire—the stock is up 39% in the past one year, and is up 63% in the past two years. Meanwhile, the S&P 500 Index is flat over the past one year, and is up just 5% in the past two years.
Sin Stocks: Diageo (NYSE: DEO)
Diageo is a European spirits giant. its major brands include Johnnie Walker, Crown Royal, Guinness, Smirnoff, Captain Morgan and Ketel One.
In the first half of the fiscal year, Diageo’s revenue rose 2%, due to 1% growth in volumes. Earnings per share grew 7% over that time, due to strict cost controls. Going forward, the company is counting on growth from emerging markets. Diageo’s sales in less-developed nations rose 4.4% over the first six months of the fiscal year.
In addition, Diageo is generating strong growth from some smaller brands, which are becoming increasingly popular. One of them is Bulleit bourbon, which posted a jazzy 26% gain in revenue growth in the first half of the fiscal year.
Diageo increased its first-half 2016 dividend payout by 5%, and the stock currently delivers a 2.4% dividend yield.
Sin Stocks: Brown-Forman (NYSE: BF-B )
While Brown-Forman might not ring any bells for many, you’ll instantly recognize its big brands. Brown-Forman manufactures the flagship Jack Daniels whiskey, along with other alcohol brands like Herradura and El Jimador tequila and Finlandia vodka.
Last year, excluding currency fluctuations, Brown-Forman grew sales by 6% and earnings per share by 11% from the previous year. It generated 22% return on invested capital last year. Brown-Forman’s biggest growth driver is growth in new markets, particularly less-developed economies around the world. It achieved 9% organic revenue growth in the emerging markets last year.
And, over the first three quarters of the current fiscal year, Brown-Forman grew organic revenue and EPS by 5.0% and 4%, respectively. Brown-Forman projects 5.0% growth in net sales and 7.0%-9.0% growth in underlying operating profit for fiscal 2016, which are excellent growth figures.
The company will rely on acquisitions to fuel future growth. Brown-Forman recently acquired Scotland-based BenRiach Distillery Company, which allows Brown-Forman more exposure to the high-growing single-malt whiskey segment.
Brown-Forman has paid a dividend to shareholders for 70 years, and has raised its dividend for 32 years in a row.
Sin stocks may turn off some investors, but the rewards are certainly enticing. Each of these stocks has seen their earnings and share prices rise over the past several years, and each rewards shareholders with delightfully high dividend yields and dividend growth.