How to Invest in Liquor

What Are Liquor Stocks?

Liquor companies are considered to be sin stocks, businesses whose activities are considered immoral or unethical by some people's standards. But the term sin stock doesn't just pertain to liquor and cigarettes. It also includes gambling, war and weapons, recreational cannabis, and companies involved in sex-related industries.

While there are many alcohol companies to choose from, two key names in the industry are liquor producer Diageo (DEO) and Constellation Brands (STZ), which makes beer, wine, and spirits. This article looks at what it means to invest in sin stocks, the market for liquor companies, as well as some of the key financial ratios for each company.

Understanding Liquor Stocks

There is a common theory that investing in sin stocks will always be profitable. According to this belief, the market for certain products like cigarettes and alcohol never dies down. The idea is bolstered even further by the notion that people tend to drink and smoke excessively when the stock market tanks during recessions—likely out of frustration—further boosting sales of sin stocks. There is some truth to this. During the first year of the COVID-19 pandemic, alcohol consumption reached a 20-year high.

These goods are considered consumer staples—products people may continue to buy even when the economy is weak. Demand for consumer staples tends to be non-cyclical, meaning consumer demand is consistent all year long. But, there's always an exception to every rule, and this theory has many cracks.

Alcohol may also be considered by some to be a luxury good, and therefore, part of consumers' discretionary spending. Depending on someone's personal circumstances, they may decide to stop buying their weekly bottle of wine or stop going to the local bar if they can't afford it. Conversely, financial stress may also lead some consumers to drink more. During the 2008 recession, beer sales fell but hard liquor sales increased.

Even in healthier economic climates, sin stocks are never a sure thing, and different companies can behave differently, under similar circumstances. Case in point: In 2015, Diageo depreciated 11.63%, while Constellation appreciated 54.93%. This difference may be explained by the fact that Constellation is a smaller company. Companies that are more nimble tend to outperform in bull markets.

The Liquor Market Overall

As consumers look to more healthy lifestyles, demand for alcohol has been waning, according to IWSR, a company that provides market analysis about the alcoholic beverages industry. The first year of the pandemic was an exception, and the group reported an increase in alcoholic beverage consumption among Americans.

Demand for beer dropped from 78.9% to 78.3% between 2017 and 2018. IWSR reported that while beer volumes dropped, consumers are still interested in craft beer. But that isn't the case for hard liquor, which still remains popular among consumers. Sales in spirits rose in 2020 to represent 39.1% of the U.S. liquor market. Super-premium liquor was the highest part of this segment, followed by high-end, premium, and value spirits.

Diageo vs. Constellation

Diageo

Diageo was founded in 1997 after Guinness and Grand Metropolitan merged and is based in London, U.K. The company has a presence in many different parts of the world. But if you don't recognize the Diageo name, you may know some of its key brands. The company is the maker of Smirnoff vodka, Johnnie Walker, Bailey's, and Guinness. Diageo also has a stake in a number of high-end brands including Veuve Clicquot and Moët Hennessy.

As of June 12, 2022, Diageo's market cap was $103.1 billion, and its share price closed at $179.57. The company offers a 2.25% dividend yield. Its return on equity was reported as being 36.43%. As of December 2021, Diageo's debt-to-equity ratio (D/E) was 1.40. The company's operating cash flow generation was reported to be $3.6 billion.

Constellation

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 Whisky, and Svedka Vodka. Constellation has been expanding primarily through acquisitions. Some of its notable purchases include wine brand Robert Mondavi in 2004 as well as the American arm of Grupo Modelo's beer business from Anheuser-Busch in 2013.

Constellation's stock closed the trading day on June 10, 2022, at $241.65, with a market cap of $45.7 billion. The company's dividend yield was 1.34%. As of February 2022, its D/E ratio was 0.79, while its return on equity (ROE) was reported at -0.34%. The company's operating cash flow as of 2021 was $2.71 billion.

The Bottom Line

Diageo and Constellation are just two of the many companies working in the business of alcoholic beverages. Like all stocks, investing is a matter of risk, research, and personal choice. While some consumer purchases may decline in periods of economic uncertainty, adult beverages are one industry that is unlikely to go flat.

Dan Moskowitz does not have any positions in DEO or STZ.