Sin stocks are publicly traded companies that produce or generate a product or activity that may be considered immoral or unethical by some people’s standards. This can include alcohol and beverage companies, and tobacco and cigarette companies. But the term actions of sin does not refer only to liquor and cigarettes. It also includes gambling companies, war and weapons companies, and those involved in sex-related industries.
One of the most popular segments in this sector is the alcoholic beverages industry. While there are many companies to choose from, two key names that come to mind are liquor producer Diageo (DEO) Constellation Brands (STZ), which manufactures beer, wine, and spirits. This article looks at what it means to invest in sin stocks, the market for alcoholic beverage companies, and some of the key financial reasons for each company.
- Alcohol is one of the most popular segments in the sin stocks industry.
- There is a misconception that investing in alcoholic beverage companies will always be profitable due to the high demand for liquor.
- Companies like Diageo and Constellation underperformed during the economic crisis.
- In 2020, Americans had the highest alcohol consumption since 1990.
Profitable Sin Actions: A Fallacy?
There is a common theory that investing in sin stocks will always pay off. That’s because there is a belief that the market for certain products such as cigarettes and alcohol never dies down. The idea is further bolstered by the idea that people tend to binge drink and smoke when the stock market crashes, probably out of frustration, further driving sin stock sales. There is some truth to this. These goods are considered consumer staples – products that people can continue to buy even when the economy is weak. Demand for consumer staples tends to be non-cyclical, meaning that consumer demand is constant throughout the year. But there is always an exception to every rule, and this theory has many cracks.
Alcohol may also be viewed by some as a luxury good and therefore part of consumers’ discretionary spending. Depending on someone’s personal circumstances, they might decide to stop buying their weekly bottles of wine or beer, or stop going to the local bar if they can’t afford it. That’s probably why Diageo and Constellation Brands stocks underperformed during the 2008 financial crisis. After all, in crisis economies, investors rarely rush to buy alcohol stocks.
Investors rarely rush to buy alcohol stocks when the economy weakens.
Even in healthier economic climates, sin stocks are never a sure thing, and different companies may behave differently, under similar circumstances. Case in point: In 2015, Diageo depreciated 11.63%, while Constellation appreciated 54.93%. This difference can be explained by the fact that Constellation is a smaller company. Companies that are more agile tend to do better in bull markets.
The liquor market in general
As consumers seek healthier lifestyles, the demand for alcohol has declined, according to IWSR, which provides a market analysis of the alcoholic beverage industry. The year of the pandemic was an exception, with the group reporting an increase in alcoholic beverage consumption among Americans.
Beer demand fell from 78.9% to 78.3% between 2017 and 2018. IWSR reported that while beer volumes fell, consumers are still interested in craft beer. But that’s not the case for hard liquors, which are still popular with consumers. Liquor sales increased in 2020 to represent 39.1% of the US liquor market. Super premium liquor was the highest part of this segment, followed by high-end, premium and value liquors.
Diageo vs Constellation
Diageo was founded in 1997 after the merger of Guinness and Grand Metropolitan and is based in London, UK. The company has a presence in many parts of the world. But if you don’t recognize the Diageo name, you may be familiar with some of its key brands. The company is the maker of Smirnoff, Johnnie Walker, Bailey’s and Guinness vodka. Diageo also has a stake in several high-end brands, including Veuve Clicquot and Moët Hennessy.
As of July 22, 2021, Diageo’s market capitalization was $ 111.40 billion and its share price closed at $ 190.65. The company offers a dividend yield of 3.73%. Its return on equity was reported to be 17.23%. As of December 2020, Diageo’s debt-to-equity (D / E) ratio was 1.72. It was reported that the generation of cash flow from the company’s operation was $ 3.07 billion.
Formed in 1945, Constellation Brands is based in Victor, New York. The company has more than 100 different brands under its umbrella, including Corona, Modelo Negra, High West Whiskey, and Svedka Vodka. Constellation has expanded primarily through acquisitions. Some of its notable purchases include the Robert Mondavi wine brand in 2004, as well as the American branch of Grupo Modelo’s beer business of Anheuser-Busch in 2013.
Constellation shares closed the trading day on July 22, 2021 at $ 223.79, with a market capitalization of $ 42.88 billion. The company’s dividend yield was 1.35%. Its D / E ratio was 1.08, while its return on equity (ROE) was reported at 9.72%. The cash flow from the company’s operation as of 2021 was $ 2.8 billion.
The bottom line
This is simply a matter of your investment philosophy. If you are looking for a stock appreciation and are willing to accept the potential for further downside risk, you may want to consider Constellation Brands. If you are more risk-averse and would like to collect dividends, you may want to consider Diageo. Just keep in mind that neither stock is likely to be exceptionally resilient if the overall market falters. That said, this should be a temporary hit in both cases.
Dan Moskowitz has no positions at DEO or STZ.