You know about socially responsible investing, or SRI, where investors steer clear of certain industries -- for example, guns, alcohol, tobacco, gambling, military equipment, and prisons -- on principle, objecting to their role in society. But have you thought of investing in these industries on purpose, and adding a sin stock or two to your portfolio? If so, you might want to consider the Molson Coors Brewing Company (NYSE:TAP), the world's seventh-largest brewer, which traces its roots back to the 1700s.
It's not such a crazy idea, as long as your values permit it. The USA Mutuals Barrier Investor, or VICEX, mutual fund, for example, focuses its assets solely on "sin" stocks, and has outperformed the S&P 500 during the past five and 10 years, though it lags it a bit during the past three. Molson Coors Brewing Company was recently a top-25 holding in the fund.
Why might you buy Molson Coors Brewing Company?
With a market capitalization topping $13 billion, Molson Coors Brewing Company is a global enterprise, featuring signature brands such as Coors, Molson, Blue Moon, Staropramen and Carling, and partner brands such as Heineken, Amstel Light, Grolsch, Singha, and Pilsner – among many others. The company has a joint venture -- MillerCoors -- with fellow brewing giant SABMiller (OTC:SBMRY), holding a 42% interest.
MillerCoors owns some craft beer brands, which are valuable, as craft beers are growing faster than mainstream beer, which has actually been losing ground to wine and spirits lately. Craft breweries enjoyed an average annual revenue growth rate of 10% during the past decade, and about 20% last year.
The MillerCoors partnership has not been the friendliest, but it's viewed as necessary for the companies to compete effectively with giant Anheuser-Busch InBev (NYSE:BUD). And besides, MillerCoors delivers about 60% of Molson Coors's profits. Anheuser-Busch InBev recently held 46% market share in U.S. beer sales, while MillerCoors held 27%.
Another promising growth driver for Molson Coors is its expansion plans. It's selling Coors in Latin America and Asia now, and investing in some local beer companies there, too. Within North America, the company is also angling for growth from underserved segments such as Hispanics, millennials, and... Hispanic millennials.
With growth having slowed in the U.S. -- volumes actually fell 1% year over year in its last quarter -- Molson Coors is beefing up its performance through cost-cutting and paying down debt. Those concerned about social responsibility will be happy to note that, although Molson Coors is, per most definitions, a "sin stock," it also gets high marks for being environmentally friendly, leading the beverage industry sector leader on the 2013/14 Dow Jones Sustainability World Index.
The company's dividend, recently yielding 2%, is another draw. Better still, it has been hiked by an annual average of 14% during the past decade, and 16% in its last increase. With a payout ratio of just 38% -- meaning that just 38% of earnings per share are paid out in dividends -- there's plenty of room for further dividend increases.
Finally, it's worth noting that there is speculation about further consolidation in the industry, with some suggesting that SABMiller might buy Molson Coors to better compete with Anheuser-Busch InBev, and others suggesting that Anheuser-Busch InBev might buy SABMiller, which might then hand over MillerCoors to Molson Coors. If Molson Coors is bought out, it will likely offer shareholders a stock-price premium.
Why might you steer clear of Molson Coors Brewing Company?
All is not perfect for Molson Coors, though. Molson Coors is a Canadian company, and the Quebec government recently hiked its excise tax on beer by 20%. On the plus side, though, the company still gets most of its revenue from the U.S.
The company is dealing with weak demand in various markets. In its last quarter, overall revenue rose just 1%. Earnings jumped 7%, though, in part due to cost-cutting, and profit margins rose, in part due to debt repayments and interest expenses falling.
In Canada, revenue dropped 7.5%, while U.S. growth was 2%, and Europe grew by 7%. Volumes dropped in the U.S., Canada, and Europe. The company's international division is still relatively small, but it's growing fast – revenue grew 26% year over year in the last quarter.
Molson Coors's stock valuation is another reason you might hold off on buying, as it's not in bargain territory, with a recent P/E ratio of 19, and a forward-looking P/E of 17, both above its five-year average of 15. Its price-to-sales and price-to-cash-flow ratios are also well above five-year averages.
Overall, there's a lot to like about Molson Coors, if you're not troubled by its status as a sin stock. Its price isn't the most fetching, though, so you might want to just keep an eye on it. Wait for a pullback, and make sure its prospects still seem promising.