As broader markets are currently giving up on gains from recent months, investors are wondering if there are any defensive spaces to weather the storm during these turbulent weeks. One such sector is potentially "sinful stocks", which include stocks of alcohol, tobacco, gambling, weapons and adult companies.
The addictive nature of these products and services generally means that most people continue to indulge in these vices in both economic good and bad times. So, these companies usually have stable income and cash flows, as well as juicy dividends. Hence, they typically perform well in times of recession as investors seeking passive income include them in their portfolios.
In previous weeks, we had discussed investing in sin stocks in the context of exchange-traded funds (ETFs). Today we look at two global stocks, British American Tobacco (LON 🙂 (NYSE 🙂 and Diageo (LON 🙂 (NYSE :), members of the
British American Tobacco
British American Tobacco, based in London, is one of the largest international tobacco companies in terms of turnover. Some of the well known brands include Dunhill, Lucky Strike, Rothmans, Kent and Camel. The company has also invested in the & # 39; next generation & # 39; products which it labels as & # 39; potentially reduced risk & # 39; that do not burn, but rather heat.
British American Tobacco Daily
In late June, British American Tobacco announced that it was strong in emerging markets. Sales increased 0.8% year-on-year (year-on-year). Cigarette sales also increased by 0.5%. Management stressed that 10% of revenues now come from non-combustible categories due to the growing customer base.
Since the lows of March, most tobacco manufacturers, including BATS, have been unstable. The tobacco sector has not yet fully recovered from its lows earlier in March, and by 2020, BATS stock is down 15% and is currently hovering around 2,815p (about $ 35 for US stocks).
Another FTSE tobacco group, Imperial Brands (LON 🙂 (OTC :), is also down more than 25%, technically placing the stock in bear market territory. Likewise, the shares of Altria Group (NYSE 🙂 and Philip Morris International (NYSE 🙂 are down 24% and 12%, respectively.
Forward P / E and P / S ratios of BATS shares are at 8.33 and 2.47, and the current price level supports a 7.5% dividend yield. We would like to buy the shares especially if they were to fall another 3% -5%.
Diageo
Stocks in the multinational beverage group Diageo also have a challenging 2020 as they are down 21%. This measure is not surprising given the pressure on the global leisure and hospitality sector. On the other hand, the picture is mixed for Diageo & # 39; s colleagues in the industry. For example, Anheuser Busch Inbev (NYSE 🙂 and Constellation Brands (NYSE 🙂 are down about 36% and 2%, respectively. Still, Boston Beer Company (NYSE 🙂 is up more than 135%.
DGE owns more than 200 brands, including Baileys, Captain Morgan, Don Julio, Guinness, J&B, Johnnie Walker, Smirnoff and Tanqueray. In recent years it has also introduced new launches or brand extensions such as Gordon & # 39; s Pink, Haig Clubman and Smirnoff Cider.
In early August, Diageo announced a modest preparation for the year ending June 30. Net sales decreased 8.7% year on year as a result of declines organically. Growth in North America was more than offset by declines in the rest of the world. Volume declines also caused organic operating profit to decline by 14.4%.
According to CEO Ivan Menezes:
"We took decisive action in the second half of fiscal 20, tightly controlling our costs, reducing discretionary spending and reallocating resources across the group."
"While the trajectory of the recovery is uncertain and volatility is expected to continue into fiscal 21, I am confident in our strategy."
The current price of 2,509p ($ 128 for US stocks) represents a dividend yield of approximately 2.75%. However, despite the recent price drop, DGE stock still trades at a relatively high price-earnings ratio of 22.27. Likewise, the P / S ratio is more than 5.
While the US and Europe remain their main markets, the company is likely to see growth in emerging markets over the decade as well. That's why we still believe in the bull case for the beverage group. Still, we'd wait for a better time to buy, possibly around 2,250p (or $ 115 for US-based stocks).
Bottom Line
What can investors expect from British American Tobacco and Diageo?
We believe that brand loyalty shown by most smokers and drinkers gives BAT and DGE prices and competitiveness in this non-cyclical market. Those unable to stop the nicotine or alcohol addiction will continue to support sales growth in this industry for the next few quarters. However, short-term trading will remain choppy at best until volatility in broader markets eases, likely towards the end of the year.
