Alongside companies operating in areas such as gambling 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?
As investors look at ways of diversifying their portfolio, many are now asking should I invest in alcohol stocks?
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Fundamentals of Alcohol Stocks
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.
Branding lends considerable pricing power to alcohol stocks. And the sizable 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.
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 19% year-to-date.
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.
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.
What is the bull case for alcohol stocks?
Sin stocks such as alcohol and tobacco have historically proven to be resistant to the effects of recession, which is why they are becoming an attractive way for investors to diversify their portfolio.
Alcohol companies typically generate strong profits, branding and consumer loyalty play a big part in this as they give these companies pricing power and a strong cash flow. Having a higher cash flow enables many alcohol stocks to pay higher dividends to stockholders, helping them generate another revenue stream whilst also growing their capital long term when they come to sell their stocks.
As companies of all shapes and sizes have faced a difficult market since the start of the global pandemic, some of the ones that are making the quickest return to pre-pandemic levels are alcohol companies.
From beer to whisky and wine to vodka, alcohol stocks can be a good way for investors to limit their risk exposure during times of economic uncertainty.
What is the bear case for alcohol stocks?
While investing in alcohol stocks can limit exposure to risk, that’s not to say they are totally risk free. All investments have some element of risk, companies can go bust or consumer trends can change rapidly.
As we all become more health conscious, it is anticipated that sin stocks such as alcohol and tobacco could be impacted. For the time being at least, alcohol stocks appear to be proving to be a lucrative investment. But that is not to say that this could change quickly in the future.
Another consideration is the competitive nature of the alcohol sector, brands that are leading the pack today could fall behind in the coming months or years. There are also the higher regulatory and tax risks to consider when investing in alcohol stocks, which could prove to be a problem further down the line.
Should I invest in alcohol stocks?
Alcohol stocks are certainly attractive to investors and could provide a great return as well as another income stream through dividends but as with all investments they do present risks. Their resilience to recession and strong comeback post pandemic are encouraging, but their future cannot be guaranteed as consumer trends change.
Whether you are a novice investor or a seasoned investor it is important to do your research and also have a robust plan in place before making any investment decisions, particularly when investing in sin stocks such as alcohol.
Potentially Relevant ETFs
AdvisorShares Vice ETF (ACT) focuses on companies within the U.S. that generate a significant part of their revenue from the alcohol, cannabis, and tobacco sectors, catering to investors interested in these industries' growth and evolving legal landscape.
ETFMG Alternative Harvest ETF (MJ) targets the cannabis industry, spanning companies involved in the cultivation, production, and biotech research of cannabis. It is a popular choice for those looking to dive into the cannabis market.
Invesco Dynamic Leisure and Entertainment ETF (PEJ) includes a wide array of companies in the leisure and entertainment industry, from gambling and hotels to restaurants and leisure facilities, offering a diversified approach to investing in vice-related activities.
Consumer Staples Select Sector SPDR Fund (XLP), though not a direct vice ETF, incorporates key tobacco and alcohol companies in its mix. This option suits investors looking for a tangential investment in vice sectors while keeping a broader focus on consumer staples.