The Wages of "Sin" Are Big Profits

Whatever your personal definition of "sin" is, there's no denying that sin stocks can make you wicked profits. Companies involved in sex, gambling, drinking, and smoking smirk all the way to the bank.

Sin stocks have largely outperformed the S&P 500. Let's examine five: Diageo (NYSE: DEO  ) , Philip Morris International (NYSE: PM  ) , Church & Dwight (NYSE: CHD  ) (NYSE: LVS  ) , Las Vegas Sands (NYSE: LVS  ) , and Pfizer (NYSE: PFE  ) .

^SPX Chart

^SPX data by YCharts.

The biggest outperformer
"The house always wins" has a kernel of truth, as a detailed Wall Street Journal study shows. Approximately 80% of the casino's take came from 10.7% of its gamblers.

Las Vegas Sands has been a monster in the casino space with the greatest exposure of all U.S. casino companies to Macau, the lucrative Chinese gambling mecca. In September alone, total Macau gaming revenue rose 21% to $3.6 billion.

JPMorgan and Nomura Securites are more bullish on Las Vegas Sands than on rivals Wynn Resorts and MGM Resorts because of Las Vegas Sands' strong VIP revenue and growing mass-market gaming tables. .

The company owns Vegas properties including the Sands Venetian, Sands Palazzo, and the Sands Expo Convention Center. These and an East Coast casino in Bethlehem, Pa., can offset any Macau weakness.

Las Vegas Sands offers a 2% yield, three-year revenue growth of 27%, and net profit margin of 18%. It is trading at 52-week highs and has a forward earnings multiple of 20.

Liquid profits
Diageo offers a 2.4% yield and has a moat of high-end liquor and wine that is generating strong brand loyalty.

Diageo has 14 strategic premium brands, six of which are No. 1 brands in their respective categories globally: Johnnie Walker scotch, Jose Cuervo tequila, Crown Royal Canadian whiskey, Smirnoff premium vodka, Guiness stout, and Baileys Irish Cream liqueur. The company operates in 180 countries, giving it a larger global reach than rivals such as Brown-Foreman and Beam.

Diageo generates a net profit margin of 16.7%. This would be higher, but Diageo is a big spender. Most notably, it has been spending to attract women and gain share in emerging markets. Diageo has expanded its line of flavored vodkas and low-calorie liquors in an effort to attract new female drinkers.

Power brands
Church & Dwight is most famous for its Arm & Hammer cleaning and dental-care products, but it also manufactures condoms and pleasure-enhancing products under the Trojan brand name.

For more than a century, the company has paid a quarterly dividend. It has made 450 quarterly payouts and raised its dividend yearly for the last 17 years. Its three-year dividend growth rate is now 50.2%.

Fellow Fool Ryan Guenette pounds the table for Church & Dwight based on 10 years of 10%-plus revenue growth, outstripping larger rivals Procter & Gamble, Colgate, and Clorox. It must be noted, however, that the company's net profit margin of 11.9% is lower than its rivals'.

CHD Revenue Quarterly Chart

CHD Revenue Quarterly data by YCharts.

When the company spends, it spends on accretive acquisitions. Since 2001, seven of the company's top-selling "power" brands (which return 80% of revenue and profits) have been acquisitions. Six of these brands own the No. 1 market share in their respective segments, including Trojan.

In the same time frame, the company has expanded its gross margin by 1,540 basis points and grown its free cash flow by $327 million. Over the next three years, the company expects free cash flow to grow to $12 billion. The company has been spending to grow its international presence, which currently generates 18% of revenue.

Blockbusters coming soon
Big pharma company Pfizer is best-known for its erectile dysfunction blockbuster Viagra, but Pfizer is so much more. It has a strong pipeline, with potential blockbusters Eliquis and Xeljanz approved last year and a half-dozen more coming soon, as CFO Frank D'Amelio said at the September Morgan Stanley Global Healthcare Conference.

The company has a portfolio of 600 legacy products that are off-patent but still profitable. It also has a strong global over-the-counter business with two of the top 10 brands, Advil and Centrum. Its purchase of Wyeth in 2009 gave it a strong vaccines portfolio as well.

Pfizer has been closing redundant manufacturing facilities, reducing them by almost 50%. It has also been reducing its workforce and its share count, with $10 billion authorized for buybacks. The company pays a dividend at a yield of 3.30% at one of the lowest payout ratios in Big Pharma, only 25%.

Overseas outperformer
No matter how you feel about smoking, it doesn't have the same stigma internationally as it has in the U.S. Philip Morris International has been an outperformer because it only sells overseas.

The company offers a yield of 4.4% and has earned a five-star rating from The Motley Fool's online CAPS community. It generated $77 billion in revenue in 2012, outshining former parent Altria and rival Lorillard. As fellow Fool Timothy Green noted, Asian volumes are growing, and Marlboro is the most popular brand overseas.

Philip Morris has an 11.4% net profit margin and a five-year earnings growth rate of 12.3%. A big caveat to keep in mind is that the European Union Parliament has approved tougher rules on tobacco, and the percentage of European smokers has declined to 28% from 40% in recent years.

Wicked profits
You, too, can smirk all the way to the bank. Las Vegas Sands, Diageo, and Church & Dwight all enjoy positive revenue growth trends and safe yields. Pfizer has a strong pipeline in vaccines and oncology, as well as a thriving over-the-counter and off-patent legacy business. Philip Morris, despite having the highest yield, will be most challenged in the long term.

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