Environmental, social, governance (ESG) investing has been a major theme in recent years, as some investors seek exposure to stocks that are actively working on their environmental and social footprint. But it can make sense to look in the opposite direction, too. So-called sin stocks have often provided attractive returns. Sin stocks are a group of companies that produce and sell products that are deemed unhealthy, such as cigarettes and other tobacco products, alcohol and so on.
Many of these product categories are very resilient during recessions. Consumers still buy cigarettes, spirits and so on during economic downturns. On top of that, since some investors do not want to invest in sin stocks, their valuations are oftentimes lower than those of other consumer goods companies, which allows for higher entry dividend yields and makes buybacks more effective.
Last but not least, a lot of regulation in these product categories means that new market entrants have a hard time, which is why many sin stocks are operating in oligopolies that allow for high margins. The combination of these factors makes sin stocks worthy of research. These tailwinds can drive compelling total returns for those that invest in sin stocks. We will showcase three such sin stocks with attractive dividend yields here.
Philip Morris (PM)
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The first of these sin stocks to buy is tobacco company Philip Morris (NYSE:PM). Philip Morris sells its products in almost all countries around the world, with the U.S. being an important exception — there, Altria (NYSE:MO) owns the rights to Marlboro and the other brands that Philip Morris controls.
Smoking is not a growth market when it comes to sales volumes. However, tobacco companies have a history of increasing the price per pack over time. Despite volumes being flat or even down, tobacco companies have been able to generate solid revenue growth over time. At the same time, price increases allow Philip Morris to grow its margins over time, which is an additional tailwind for the company’s net profits.
Since cigarette sales volumes do not grow materially, there is no need to invest heavily in new production facilities or machinery. The vast majority of the operating cash flow that Philip Morris generates is thus available as free cash that can be used for dividends or share repurchases, which is why Philip Morris has been offering an attractive income yield for many years.
Thanks to the recession-resistant business model, Philip Morris has also been able to grow its dividend very reliably, as the company has increased its dividend every year since it was spun off from Altria 15 years ago. At current prices, Philip Morris offers a dividend yield of 5.5%, which is quite attractive.
Based on this year’s expected net profits, the payout ratio is relatively high, at 90%. However, Philip Morris has always operated with a high payout ratio, and it has not stopped the company from increasing its dividend each year. The strong U.S. dollar is a headwind for Philip Morris’ earnings this year, due to its large overseas exposure, but it is likely that the dollar will not continue to strengthen forever, which is why this headwind should wane eventually. This would allow for a lower payout ratio in the future.
Molson Coors Beverage Company (TAP)
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Molson Coors (NYSE:TAP) is a beer and malt beverage company that has a history dating back almost 250 years. Molson Coors owns brands such as Coors Light, Miller Light, Carling and so on. On top of the U.S., it is also active in a range of additional markets in South America, Europe, Asia and Africa. Molson Coors is not the largest beer company in the world, but it’s one with a long history and established brands.
Beer demand is not very cyclical, which is why Molson Coors has generally fared well in past recessions. During the first year of the pandemic, its EPS declined only slightly. This was a result of a decline in sales at restaurants, bars, sporting events, concerts and so on declined compared to previous years. In 2021, however, Molson Coors already saw its EPS expand again.
Based on annual dividends of $1.52, Molson Coors is currently offering a dividend yield of 3%. That’s close to twice as high as the broad market’s dividend yield. Based on the expected net profit for the current year, Molson Coors’ payout ratio is just 39%. This looks very sustainable, especially when we consider that the company does not need to invest a large amount of its cash flows for capital expenditures. Therefore, its free cash conversion is high.
Molson Coors reduced its dividend in 2020, and it remains below pre-pandemic levels for now. However, the low payout ratio should allow the company to get the dividend back up to the old $1.96-per-year level in the not-too-distant future.
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Diageo (NYSE:DEO) is an alcoholic beverage company as well, although it focuses on spirits primarily. Its brands include Jonnie Walker, Smirnoff and Tanqueray. Its history dates back more than 300 years. The company remains headquartered in the U.K., where it was founded in the 17th century.
Like Philip Morris and Molson Coors, Diageo has generally been resilient versus recessions and other macro shocks. Demand for alcoholic beverages is not very cyclical. In 2020, Diageo felt a small hit to its earnings, but the company has been hitting new record EPS levels in fiscal 2022 (it is currently in fiscal 2023, which is forecasted to be another record year).
The company pays out 47% of its profits, based on this year’s expected EPS and an annual dividend of $4 per share. That makes for a dividend yield of 2.2% at current prices, which is the lowest among these three companies but still easily higher than the yield one can get from the broad market today.
Diageo has a solid dividend-growth track record, having increased its dividend reliably in recent years. The dividend growth rate is in the mid-single digits, on average. At current prices, Diageo is trading for just below 20x this year’s expected net profit, which is a low-ish valuation relative to how Diageo was valued in the past. Diageo traded at earnings multiples of more than 20 over the last five years, suggesting right now might be a better-than-average time to enter or expand a position.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.