Earnings reports for Diageo (NYSE: DEO), the world’s largest liquor maker, and other similar companies are proving that “sin stocks” are doing well, during a recession in which the only items consumers appear to be spending money on are seen as small comforts in an otherwise difficult time.
Diageo, maker of drinks including Guinness and Johnnie Walker, reported earnings of $3.48 billion for the year through the end of June, a 12% increase from a year earlier. Sales rose 5% from a year earlier. Investors should note that gross profit margins are 58 cents per dollar of after-tax sales and dividends are up 5.5%. (The icing? The company carries little debt.)
The liquor company and others like it are benefiting from the reality that consumers apparently drink and smoke more when times are bad. The London-based company’s brands include Smirnoff vodka, Captain Morgan rum, J&B scotch, Tanqueray gin, Crown Royal whisky, as well as wines. The stock made a 52-week high of $71.99 in late April, dipped lower and then appeared to be heading up again. At $65 apiece, DEO are a modest 13 times forecast earnings, with a dividend yield of 3.5%.
These so-called “sin stocks” have historically done well during trying economic times, in part because consumers will spend money on alcohol, chocolate, cigars and the like at home when they can’t afford a cross-country vacation for summer or the holidays. These noted smaller comforts tend to increase when larger-ticket items appear out of reach for consumers.
The Mutual Fund Vice Fund, whose three biggest holdings are cigarette stocks Philip Morris International (NYSE: PM), Lorillard (NYSE: LO) and Altria Group (NYSE: MO), is up +7.12% from last year. PM is up +7.28% year-to-date, MO is up +15.09% year-to-date, and LO just added a 12.5% increase in the quarterly dividend on its stock. As well, Altria, which manufactures and sells not only cigarettes, but wine, and other tobacco-related products in the United States and internationally, announced an 8.60% increase in its quarterly dividend to 38 cents a share. This was not the first, but the second dividend increase this year.
On average, the Vice Fund notes that stocks of cigarette makers are up an average 12%. Alcoholic beverages are up +6%.
And right now, liquor companies can be seen as prime real estate to acquire. Central European Distribution Corp. (NASDAQ: CEDC), a leading integrated spirits beverage businesses operating primarily in Europe, is down -19.5% year-to-date against the Dow’s -3.4% and S&P’s -5.5% at $22.87 a share. But CEDC is currently trading below its 50-day moving average of $24.92 and below their 200-day moving average, so this pick could be a great value play at the bottom after the euro zone debt woes.
As well as drinkable “sins”, more people begin to eat at home during down times, which drives fine-dining restaurant sales down while propping casual dining restaurants up. YUM brands, which encompass KFC, Taco Bell, Pizza Hut, Wingstreet, Long John Silver’s and A&W restaurants, is up +20.3% year-to-date against the Dow, some +5% higher than just a few weeks ago.
As sins go, these are ones that may just be heaven sent.
As of this writing, Burke Speaker did not own a position in any of the stocks named here.
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