Want to invest in a company that stands a solid chance of surviving in an economic slowdown and also fares well during good economic times? Obviously there are no guarantees, but "sin stocks" may just offer such an opportunity.
What is a Sin Stock?
Companies that make or deal in alcohol, tobacco, pornography or weapons-related products are all typically defined as "sinful companies". These types of stocks can be somewhat more sheltered from the business cycle. It doesn't matter if times are good or bad, history has taught us that people will always find money to spend on alcohol, cigarettes and adult entertainment. (To learn more, read A Prelude to Sinful Investing.)
If nothing else, adding sin stocks to one's portfolio may make it more defensive and help it weather a market downturn. Let's have a look at some of this week's top contenders:
|British American Tobacco (NYSE:BTI)||$64.74B|
|MGM Mirage (NYSE:MGM)||$8.97B|
|Northrop Grumman (NYSE:NOC)||$23.28B|
|WMS Industries (NYSE:WMS)||$1.59B|
|Wynn Resorts (Nasdaq:WYNN)||$9.38B|
|Data as of market close September 4, 2008|
Northrop Grumman makes equipment that keeps us, and our troops, safe. The California-based company is known for hardware including: The B-2 Stealth Bomber and the KC-45 refueling tanker.
The company is coming off a solid second quarter. In the period ended June 30 it earned $495 million or $1.44 per share. That's a nice jump from the $460 million, or $1.31 a share, Northrop Grumman earned in the comparable period last year. Backing out discontinued operations, earnings came in at $1.40 per share, which was in line with estimates. (For more on earnings per share, check out How To Evaluate The Quality Of EPS.)
Meanwhile, Northrop Grumman's revenue number came in a touch over $8.6 billion, which was north of the almost $8.3 billion that analysts were looking for.
At present per Yahoo Finance the Street is looking for the company to earn $5.14 per share this year and $6.21 per share next year. After running the numbers on my trusty calculator, that means that the company currently trades at about 13.5 times the current year estimate and at about 11.2 times the current 2009 estimate. (To learn more, read P/E Ratio: Introduction and Investment Valuation Ratios: Price/Earnings Ratio.)
Dividend Increase A Good Sign
A tidbit that caught my eye earlier in the year was that the company jacked up its dividend 3 cents to a nice round 40 cents. In my book, this is a sign that its management is optimistic about the future. The current yield on the dividend: 2.3%. Also its payout ratio is only 31% which gives investors confidence that the dividend is under little pressure to be reduced.
Sin related stocks are in no means guaranteed to generate superior market returns. However, many believe them to be a safe haven, particularly during an economic downturn. What do you think of investing in sinful stocks? Are any of these sinful stocks prudent investments, even if some may consider them socially distasteful? Join in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.
If "sinful stocks" have a place in your portfolio, but you prefer mutual funds, read Socially (Ir)responsible Mutual Funds.