Some industries become obsolete over time. For example, streaming service Netflix contributed to the demise of the once-popular movie store rental chain Blockbuster, which filed for bankruptcy in 2010. However, sin products like alcohol and tobacco, have been consumed by people for centuries and will always be in demand, regardless of the state of the economy or the health detriment caused by using these products.
Are these sin stocks good investments for investors seeking recession-proof options?
1. Boston Beer Company
Boston Beer Company (SAM 2.44%) is a large U.S.-based company that's a leading provider of alcoholic beverages like light beer, craft beer, and hard cider. It owns several popular brands like Samuel Adams Beer Brand, Angry Orchard, Twisted Tea, and Truly Hard Seltzer. One of its main advantages over smaller breweries is the large economies of scale, which allows it to mass-produce generic beer, craft beer, and other alcoholic beverages in its facilities throughout the U.S.
The craft beer market might seem saturated as there are over 7,000 craft breweries in the U.S. However, Boston Beer Company can compete with these small firms due to its real estate, acquisition of craft brand Dogfish Head Brewing for $300 million in May 2019, numerous types of alcoholic beverage brands, and strong financials.
It has a relatively low debt-to-equity ratio of 0.06, a net profit margin of 10%, a strong return on equity of 20.47, and a free cash flow of $114.5 million for 2019. The stock price is currently trading around $367 per share, which is almost equidistant from the 52-week low of $230 and the 52-week high of $444. These strong financials and the Dogfish Head Brewing acquisition show big opportunity for upside. The annual revenue increased by 29%, debt has remained low or non-existent, and assets have increased by 65% since 2016. Lastly, UBS gives this stock bullish ratings due to the growth of its subsidiary seltzer brand, Truly, as it projects that Truly's annual revenue growth will be 75% in 2020.
Yet, investors should be aware of the beer industry's saturation, the company's low three-year compound annual growth rate (CAGR) of 1.26%, the lack of a dividend, and its low cash reserve of $0.03 billion before taking a sip of this stock.
But for investors thirsty for returns, Boston Beer's diverse revenue streams from its many brands, low debt, and high growth revenue rates make it a great choice.
Cigarette maker Altria (MO 1.68%) has ownership stakes in many brands including Philip Morris USA, U.S. Smokeless Tobacco, John Middleton, and Marlboro. Marlboro is the leading cigarette brand in the U.S. and has been around since 1924.
While most of Altria's brands revolve around tobacco and related products, it has a 10.2% interest in the world's largest brewer, Anheuser-Busch InBev (BUD 1.93%). It also owns 45% of Cronos (CRON 0.57%), a Canadian cannabis company, and has a 35% stake in JUUL Labs, a leading producer of electronic cigarettes. These diversified holdings provide it with many sources of revenue that will always be in demand. Its international exposure since Anheuser-Busch InBev products like Budweiser beer can be found throughout the world, including Belgian brewing behemoth InBev that Anheuser-Busch bought in 2008 for $52 billion.
On top of these impressive ownership stakes, Altria has solid financials, including a high dividend yield of 6.68%, a low forward P/E ratio of 11.15, a net profit of 8%, and free cash flow of $6.83 billion. The current stock price is approximately $50 per share, which is $7 lower than its 52-week high.
Its dividend yield has ranged from 3.5% to 6.68% over the last five years and the current payout ratio is 348.59%, which means that the company will have a harder time sustaining current dividend yields. The payout ratio is calculated by dividing dividends per share (DPS) by earnings per share (EPS), and a payout ratio over 100% means a company is paying more to investors than it's earning.
Investors should recognize Altria's brand holdings, dividend yields, high payout ratio, profitability, and high debt to equity ratio of 2.55 before investing. Altria's stock offers exposure to growth in cigarettes, e-cigarettes, and various types of alcohol, which are always in demand regardless of the economy. This can be seen by its above-average net income three-year annualized growth rate of 9.93%. It has exposure to the cannabis market via its ownership in Cronos, which will see its sales grow exponentially as more states and countries continue to legalize marijuana.
What should investors think?
Industries come and go, but consumer staples products like alcohol and tobacco will always be around. Therefore, investors can take advantage of these recession-proof products by investing in companies that provide them. For example, both of these companies had lower price percentage decreases compared to the S&P 500 during the Great Recession in 2008. The S&P 500 had a negative return of 39% while Boston Beer and Altria had negative returns of just 20% and 36% during this year, respectively. Besides this, both these firms have been around for more than 20 years.
Out of these two stocks, Altria is the better investment choice today due to its high dividend yield, lower price point, exposure to both tobacco and alcohol brands, high three-year annualized net income growth figure of 9.93%, and low forward P/E ratio of 11.15. Altria is continuing to grow, has been publically traded since the 1970s, and is continuing to tap into new markets like legalized marijuana.