I have long been a fan of portfolios exposed to the sinful sectors, such as tobacco, alcohol, and gambling, as these industries tend to perform well through times of turbulence. Are people going to stop smoking, drinking, or gambling when the Federal Reserve stops its quantitative easing programs? Of course not! Addictive business models are my favorite because consumption is consistent and inelastic through all market conditions. In this article, I would like to share some of my favorite investment vices.
Coughing up returns
I wanted to start it off with the high quality global tobacco company, Philip Morris International Inc. (NYSE:PM), which currently pays shareholders a secure 3.6% dividend yield. Founded over a century ago, Philip Morris International Inc. (NYSE:PM) is dominant player in today’s international tobacco market, controlling seven of the top 15 tobacco brands worldwide, including Marlboro, the world’s best-selling cigarette brand.
The company holds an estimated 16.3% share of the total international cigarette market outside of the United States, or 28.8% excluding the People’s Republic of China and the United States. While tobacco demand has stabilized here in developed countries the demand in the developing world has been on a steady rise.
Currently, 82% of the world’s smoking population resides in low and middle-income countries, which bodes very well for the company in the years ahead. I expect demand for the company’s products to continue higher as the developing world is far from serious tobacco regulation.The company pays roughly 60% of its earnings to shareholders while maintaining a strong return on assets over 24%. As a result, investors should see increasing earnings and dividends in the near future.
Drinking worry away
Diageo plc (ADR) (NYSE:DEO) is a global beverage company with iconic brands in its portfolio such as Johnnie Walker, Crown Royal, J&B, Windsor, Buchanan’s and Bushmills whiskies, Smirnoff, Ciroc and Ketel One vodkas, Baileys, Captain Morgan, Jose Cuervo, Tanqueray and Guinness.
The company currently pays shareholders a 10-year-bond-beating 2.3%. The company is diversified globally across 180 different markets. North America generates around 33% of net sales, Europe 28%, Africa 13%, Latin America and Caribbean 12%, and Asia Pacific 14%.
Going forward, I expect we will see the company draw increasing revenue from its Asia Pacific business as a result of increased demand for premium liquors. Asia remains a key market for the company as there is a demand surge set to take place in the years ahead. This increased demand is going to come as a result of the 57 million new consumers of legal-drinking age every year in the region, increasing levels of gross domestic product, and the growing middle class.
Additional capital expenditures aren’t significant as the company is already established in the region. Instead the shift to higher quality single malts is going to be the key angle for the company. As earnings per share rises, I expect management to maintain the current dividend payout ratio, thus increasing dividends for years to come.
