There is a common theory that investing in “sin” products will always be profitable. This idea is bolstered by the notion that people drink and smoke more excessively when the stock market tanks, thus further boosting sin stock sales. But this theory has many cracks in it.
Consider companies like liquor producer Diageo plc (DEO) and beer, wine and spirits maker Constellation Brands Inc. (STZ). Both stocks fared poorly during the 2008 financial crisis. In truth, in down economies, consumers cut down on discretionary spending, therefore investors seldom rush to buy alcohol stocks.
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, DEO, which produces Johnnie Walker, Crown Royal, Smirnoff, Captain Morgan and Guinness, depreciated 11.63%, while STZ, which produces Svedka Vodka and Black Velvet Canadian Whiskey, appreciated 54.93%. This difference may be explained by the fact that STZ is a smaller company, and more nimble operations tend to outperform in bull markets (see related story: Premium Spirits Drive a Premium Valuation for Beam).
The Liquor Market Overall
Premium liquor represents 36.30% of total liquor volume in the United States. At least 33% of the spirits market falls under the whiskey category. This was followed by vodka, at 25%.
When you think of liquor, you’re more likely to think of Diageo than Constellation Brands, because Diageo sells scotch, Irish whiskey, gin, rum and tequila in addition to wine and beer.
Diageo also currently offers a 2.30% dividend yield, where Constellation Brands offers no yield. However, this doesn't guarantee that Diageo will be more profitable than Constellation Brands, moving forward. According to Constellation Brands most recent 10-Q, the company is focused on sales growth, increased cash flow, and margin expansion while also reducing borrowings.
Both Diageo and Constellation Brands have similar debt-to-equity ratios of 1.31 and 1.30, respectively. However, there is a wide gap in operation cash flow generation over the past year, with Diageo at $3.17 billion and Constellation Brands at $947.20 million.
The Bottom Line
This is simply a matter of your investment philosophy. If you’re looking for stock appreciation and you're willing to accept the potential for increased downside risk, then you might want to consider Constellation Brands. If you’re more risk-averse and would like to collect dividends, then you might want to consider Diageo. Just keep in mind that neither stock is likely to be exceptionally resilient if the broader market falters. That said, this should just be a temporary hit in both cases. (For related reading, see: Making Money at the Duty-Free Shop.)
Dan Moskowitz does not have any positions in DEO or STZ.