The Global Sin Portfolio

LONDON -- If you're looking to invest in companies that should be able to grow their profits even in today's uncertain times, you could do a lot worse than to consider those that are involved in what some people call "sinful" activities: alcohol, defense, gambling, and tobacco.

Today I'm setting up a demonstration portfolio that will invest about 20,000 pounds in companies that operate in these sectors. I plan to review it on a quarterly basis, and there will be no changes to it in between these dates.

Booze and ciggies in all seasons
Sales of alcohol and tobacco tend to remain steady during an economic downturn because people still drink and smoke when times are hard. Smokers find that it's especially difficult to cut back, because they are addicted.

This strategy of investing by picking out preferred sectors of the stock market is one I've followed for many years. Alcohol is one of my favorites, along with consumer goods, because of their defensive qualities and exposure to the emerging-market nations. I would also have chosen tobacco as a place to invest, were it not for the fact that I won't touch it because of the effect that it has upon people's health.

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Gambling and defense are less resilient
Recent years have shown that gambling isn't as recession-proof as it once was, and the high-street bookmakers like Ladbrokes and William Hill have seen the Internet gambling companies take a share of their markets. The industry is also under pressure from governments trying to push punters toward their own national lotteries, which offer much poorer value, in order to boost their tax take.

The demand for defence has declined since the end of the Cold War, and budgets are coming under further pressure nowadays because governments are trying to cut public spending. However, when war -- or even a bit of saber-rattling -- breaks out, this will produce a lot of new equipment orders (even in a recession), and as a result, the defense industry tends to be non-cyclical.

Consequently, the portfolio will be biased toward alcohol and tobacco, with roughly 40% in each sector, as I am more cautious about the prospects for defense and gambling.

The oldest industry
According to many historians, the first industry was brewing, though agriculture soon followed when the hunter-gatherer tribes of Mesopotamia realized the best way to ensure a reliable supply of the grains needed to make beer was to farm crops.

In the last few years, global alcohol consumption has risen, though consumers in the developed world have tended to cut back on beer and instead drink more spirits and wines. As there isn't a large British publically quoted wine company, 40% of the global sin portfolio is split between the world's largest distiller, Diageo (LSE: DGE.L  ) , and brewing giant SABMiller.

Governments love and hate tobacco
Governments in the developed world are trying to cut tobacco consumption because of the health-care costs that smoking imposes on society. They are doing this by consistently raising tobacco taxes and restricting its sale -- though they'd be horrified if everyone quit, as this would blow a massive hole in their finances.

A good example of how sales are restricted is the law that makes it illegal to smoke inside a public building, while the push toward plain packaging and other advertising restrictions is a less-than-subtle attempt to destroy some of the value of the top tobacco brands.

However, sales of tobacco in the developing world continue to grow strongly, and if you're comfortable with profiting from this, then the two British giants, British American Tobacco (LSE: BATS.L  ) and Imperial Tobacco (LSE: IMT.L  ) , deserve consideration. Roughly 20% of the sin portfolio is going into each of these companies.

Don't bet your bottom dollar
As mentioned earlier, the last few years have shown that gambling is only "recession-resistant," rather than recession-proof, as gamblers cut their spending. Consequently, I'm only putting 10% of the sin portfolio into gambling, and this is going into a company that doesn't rely too heavily upon high-street bookmaking shops. It's Rank Group (LSE: RNK.L  ) , whose main businesses are the Mecca Bingo halls and Grosvenor casinos.

Planes, guns, and tanks
The fourth sin category is defense, an industry many people dislike because many of its products maim and kill people. Some go so far as to argue that that the industry deliberately hypes threats in order to support the military-industrial complex."

The final 10% of the global sin portfolio is going into BAE Systems (LSE: BA.L  ) -- Britain's largest defence company, whose biggest customers by a long way are the American and British governments. BAE has interests in pretty much every part of the defense industry, as well as substantial civilian aerospace interests to provide some diversification.

Show me the money
The key figures for all six companies are summarized in the table below. Please note that the share price quoted in this case is the offer price -- the price you would pay to buy the shares.

Company

Share Price (pence)

Historic P/E

Dividend (pence)

Yield

BAE Systems

297.4

8

18.8

6.3%

British American Tobacco

3,351

17.1

126.5

3.8%

Diageo

1,651.5

19.8

41.5

2.5%

Imperial Tobacco

2,657

14.1

98.7

3.7%

Rank Group

119.5

11.2

2.1

1.8%

SAB Miller

2,629.5

19*

58.7*

2.2%

*Based on the current pound-USD exchange rate.

The next table is arranged in order of share price performance over 10 years. As you can see, the alcohol and tobacco companies I've chosen have trounced the FTSE 100 index, which in turn has outperformed both the defense and gambling companies.

Company

5-Year Growth

10-Year Growth

SAB Miller

107.2%

413.3%

British American Tobacco

99.1%

368.8%

Imperial Tobacco

14.9%

129.1%

Diageo

60.3%

104.9%

FTSE100

(15.9%)

21.9%

BAE Systems

(27.1%)

(11.9%)

Rank Group

(34.7%)

(68%)

The final table shows the global sin portfolio. Everything has been "bought" at the offer price at the time when the market closed yesterday evening through an online stockbroker that charges 10 pounds a trade, allowing for stamp duty at 0.5%, and the total cost is rounded off to the nearest pound.

Company

Offer Price (pence)

Shares Bought

Cost (pounds)

BAE Systems

297.4

680

2,042

British American Tobacco

3,351

120

4,051

Diageo

1,651.5

240

3,993

Imperial Tobacco

2,657

150

4,015

Rank Group

119.5

1,660

2,003

SAB Miller

2,629.5

150

3,973

 

 

Total

20,077

The current yield on the global sin portfolio is approximately 3.25%. I'll be checking back in three months' time, when I have reasonable hopes that it will have beaten the FTSE 100 -- which, for the record, stands at 5,627.3 as I type this.

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Further investment opportunities:

Tony owns shares in Diageo and SABMiller, but he doesn't own shares in any of the other companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Diageo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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