‘Sin’ stocks keep expanding their markets

Article Excerpt

They face ever-tightening government restrictions and high taxes, but many so-called “sin stocks”—companies focused on gambling, tobacco and alcohol—continue to deliver steady returns (see graphs). Recession proof profits This is no surprise considering that consumer spending on leisure, alcohol and tobacco is one of the least cyclical categories: people tend to maintain their spending on these products during recessions, as we saw in 2008 and 2009. Highly profitable industries The alcohol, tobacco and gambling industries are highly regulated, which creates barriers to entry for new competitors. This is one of the main reasons why many of the top global companies in this segment have predictable cash flows and steady returns on invested capital. As an example, we highlight the returns and profit margins for some of the largest holdings in the sin stock ETFs covered on pages 23 and 24. Over the past 10 years, the profitability of Diageo (see box on page 23) and British American Tobacco remained at very high levels…

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