Alongside companies operating in areas like weaponry, gambling, marijuana and tobacco, publicly-traded alcohol firms are commonly counted among the so-called ‘sin stocks’ on the market.
The name sin stocks comes from an association with supposedly immoral or unethical activities. However, this is really just a way to categorise and group disparate industries in an easy way. Plus, many of us are happy to use these products – so why wouldn’t we invest in them too?
One of the most obvious benefits for investors is the number of popular alcohol brands on the market. This includes everything from Pernod Ricard’s (EPA: RI) Jameson to Brown-Forman’s (NYSE: BF.B | NYSE:BF.A) Jack Daniel’s.
The whisky/whiskey distinction comes down to location—from Scotland and Japan it’s whisky, while from Ireland or the US then it’s whiskey with an ‘e’. But whatever the spelling, pick your favourite tipple and there’s a good chance you can invest in the company that makes it.
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The Virtues of Sin Stocks
Branding lends considerable pricing power to alcohol stocks. And the sizeable cash flows and global distribution networks this drives can help firms to pay out strong dividends. Because of this, dividends are a major factor to consider when it comes to investing in alcohol stocks.
Brown-Forman, for example, is among Sure Dividend’s ‘Dividend Aristocrats’—a list of 65 S&P 500 stocks that have raised dividends for 25 or more consecutive years.
Not only that, but the company is actually expanding its distillery amid a growing demand for American whiskey. Indeed, it plans to double the capacity of its facility in Louisville, Kentucky. This follows an 18% rise in reported net sales of its premium bourbons in its fiscal first half.
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An alcohol stock with a similarly strong dividend history is London-listed Diageo (LON: DGE).
The firm, which owns world famous whisky brand Johnnie Walker, paid consistently higher interim and final dividends all the way though to 2019. And while it opted to maintain its final financial 2020 dividend amid the pandemic, it has already hiked its interim dividend for financial 2021.
Indeed, despite the Covid-19 crisis, as well as the recent Indian case surge, Diageo shares are up 11% year-to-date.
Over in Paris, Pernod Ricard’s shares are up 9% so far in 2021, having already surpassed their price at the start of 2020 despite a pandemic-driven dip. Pernod Ricard keeps itself decentralised, with 86 direct affiliates worldwide, as well as 94 production sites. Its brands are distributed in more than 160 countries.
Some countries, like South Africa and Greenland, temporarily banned the sale of alcohol. However, alcohol’s position as a consumer staple has likely helped aid recovery among these stocks.
It seems like these supposed sin stocks may, in fact, have some very compelling virtues. The most important to look out for are familiar brands, large distribution networks, and solid dividends.
Distiller For Hire
Alongside more typical alcohol stocks are craft distilleries. Craft breweries have ballooned in popularity of late. In the US, for example, Brewers Association figures showed an explosion in the number of sites, from 4,803 in 2015 to 8,764 in 2020.
This was accompanied by a rise in craft distilleries making spirits like gin and rum as well as, of course, whisky. This is where MGP Ingredients (NASDAQ: MGPI | FRA: M1I) makes its name. MGP functions as a whiskey distiller-for-hire for both craft and premium brands.
MGP has seen major share price gains from the craft distillery boom, rising more than 300% since 2015. At the start of April, MGP completed its acquisition of US whiskey maker Luxco. Luxco owns bourbon whiskey brands like Rebel Yell, as well as traditional Irish whiskey brand Quiet Man.
Using a craft distillery like MGP lets brands focus their efforts on marketing and branding. Meanwhile, MGP handles the distilling process itself.
In High Spirits
As Bob Ciura at Sure Dividend put it: “Investors looking for companies that generate strong profits and pay dividends should take a closer look at the major alcohol stocks.”
Sure Dividend’s list of top six alcohol stocks includes Constellation Brands (NYSE: STZ), which makes High West Whiskey, as well as Brown-Forman of course.
But its number one pick is Diageo, which, aside from whisky, also owns Guinness stout as well as Smirnoff vodka and Baileys Irish cream liqueur.
Meanwhile, vino vest’s list of top 2021 alcohol stocks also includes Brown-Forman, as well as Corby Spirit and Wine (TSE: CSW.A | TSE: CSW.B) – a Canadian company 46% owned by Pernod Ricard. Corby Spirit and Wine’s portfolio includes JP Wiser’s Whisky.
Anheuser-Busch InBev (NYSE: BUD | EBR: ABI | JSE: ANH | FRA: 1NBA) also made both recommendation lists. Understandable, given the company’s portfolio of more than 400 beer brands like Budweiser, Stella Artois, and Becks.
With so many famous brands in the space, as well as adjacent businesses like MGP Ingredients, alcohol stocks should be first in line for any investor planning to diversify. This is especially true for anyone seeking relatively stable companies with impressive dividends.
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Vice ETFs, or investments in "sin stocks," encompass sectors such as alcohol, tobacco, gambling, and defense. These industries often withstand economic downturns, drawing investors' interest across various market scenarios. Below are some ETFs centered on these areas:
AdvisorShares Vice ETF (ACT) targets U.S. firms earning substantially from alcohol, cannabis, and tobacco. It aims at investors seeking to benefit from growth and legislative shifts in these industries.
ETFMG Alternative Harvest ETF (MJ), mainly geared towards the cannabis industry, encompasses entities from cultivation and production to biotech companies engaged in cannabis research. It stands out as a sought-after choice for those keen on the cannabis sector.
Invesco Dynamic Leisure and Entertainment ETF (PEJ) spans the leisure and entertainment industry, touching on gambling, hotels, restaurants, and recreational facilities. This ETF offers a broad perspective on vice investment, including a variety of leisure pursuits.
Consumer Staples Select Sector SPDR Fund (XLP), while not purely a vice ETF, integrates significant tobacco and alcohol firms in its portfolio. This fund is an indirect route for investing in vice industries, alongside a wider consumer staples sector exposure.
Roundhill Sports Betting & iGaming ETF (BETZ) zeroes in on the online sports betting and iGaming sector, covering entities in online gambling, sports betting, and related domains. It presents a focused investment opportunity in the burgeoning online gambling arena.
SPDR S&P Aerospace & Defense ETF (XAR), not exclusively a vice ETF, provides access to the defense industry, including military equipment manufacturers and defense service providers. It caters to those seeking to capitalize on the defense sector's resilience and prospects for expansion.
