Is It Wise to Invest in Vice?

Despite the ominous caricature, sin stocks represent an opportunity for those willing to recognize and capitalize on our greatest vices by investing in industries involved in the sale and production of alcohol, tobacco and weaponry, amongst other things. While investing in firms whose activities are perceived as unethical is bound to draw scrutiny from self‐professed socially responsible investors, from a solely investing standpoint there are many arguments that can be made in favor of sin stocks

The first mental barrier to overcome for investors is the morality behind investment decisions. Investing in the stock market has long been viewed as a tool to generate passive income from the operations of well‐ established firms of all industries. For the average retail investor, apart from expressing their personal beliefs, deciding not to invest in tobacco firms like Philipp Morris or defense contractors like Raytheon will do little to fundamentally change or limit the ‘unethical’ nature of these industries. Tobacco companies will continue to sell cigarettes and defense contractors will secure new contracts irrespective of whether you choose to invest a few thousand dollars in purchasing their stocks — a paltry sum compared to their billion dollar market capitalizations and financing from institutional investors. Moreover, morality is undoubtedly a highly subjective matter within your own personal ethos. For instance, while investing in defense companies can be seen as perpetuating war and violence, others may consider it an act of patriotism. Likewise, the taboo surrounding marijuana consumption may dissuade individuals from investing in cannabis companies, whereas those who see no harm in its recreational and medicinal uses may choose to invest. The bottom line is, you shouldn’t be deterred from investing in sin stocks purely on the basis of public consensus alone.

That said, in financial terms, a considerable number of sin stocks have historically been solid investments with well‐defined characteristics. Almost all vice products are inelastic in nature which translates to better revenue generation and predictability. Regardless of economic conditions, people continue to purchase liquor and smoke cigarettes, and governments continue to ramp up defense on a larger scale relative to other industries. In spite of the 2008 global crisis, the Distilled Spirits Council of the United States reported that revenue from liquor suppliers rose 2.8% from the previous year to $18.7 billion in 2008. Additionally, the firearms industry has grown nearly 168% since 2008 as gun‐makers report consistent year over year sales despite economic fluctuations, signaling that it is relatively more recession proof compared to other industries. For investors, generating consistent and positive returns is the ultimate end goal. Sin stocks represent an opportunity to do so by allowing investors to eliminate uncertainty and reduce overall risk due to economic volatility.

Another aspect to consider is the intrinsic stock price and potential dividend yield. Given that many investors shy away from sin stocks, vice companies tend to be undervalued with stocks being offered at a discount. Combining this fact with the steady and strong financial results that vice companies have historically shown over the decades presents a lucrative break. The tobacco industry, for instance, is often subject to market speculation about FDA action on products such as e‐cigarettes, menthol cigarettes and other offerings that often results in momentary price declines. Both Philipp Morris International (PMI) and tobacco giant Altria Group have experienced these, leading to their stock being undervalued. Even with fewer people smoking and increased government regulation, both PMI and Altria have continued to thrive. Since 2007, PMI reported a gross profit margin consistently above 60% for the past decade with $78 billion in net revenues last year. Moreover, vice companies are high cash flow businesses that tend to pay sizeable dividends. For instance, alcohol beverage producer Diageo & PMI offer dividend yields of 3% and 5.8% respectively, higher than majority of blue chip stocks.

Lastly, investing in sin stocks doesn’t necessarily mean putting money into risky, uncharted territory. Many of these firms are industrial giants with a well‐established, sometimes multinational presence and several iconic brands to their name. Anheuser‐Busch InBev, for instance, is the world’s largest brewer and has over 500 beer brands in over 100 countries. These brands include Corona, Stella Artois, Budweiser and Busch, an indication of their sheer diversification. Meanwhile, defense contractor Lockheed Martin just reclaimed its position last year as the world’s largest arms supplier, reporting 2017 annual revenues of $51 billion, largely due to the contract it has with the US government for the manufacture of F‐35 fighter jets.

Taking into account the holistic profile of vice firms, their historically strong financial results and low volatility, we can see that for the emboldened investor, sin stocks are worth looking into. That said, there is no substitute for due diligence and thorough research. At the end of the day, what you invest in is a personal choice that only you can morally and financially justify.

Written By Aditya Kumar, Undergraduate Economics Student

1. PMI gross profit margin & net revenue statistic: http://media.corporate‐ir.net/media_files/IROL/14/146476/2018%20AR/PMIAR2017‐Final/index.html 

2. Diageo dividend yield: https://www.dividend.com/dividend‐stocks/consumer‐goods/beverages‐wineries‐and‐distillers/deo‐diageo‐plc/ 

3. Philip Morris dividend yield: https://www.dividend.com/dividend‐stocks/consumer‐goods/tobacco‐products‐other/pm‐philip‐morris‐international/ 

4. “Distilled Spirits Council of the United States reported that revenue from liquor suppliers rose 2.8% from the previous year to $18.7 billion in 2008.”: https://www.postandcourier.com/business/is‐the‐alcohol‐industry‐recession‐proof/article_182c532a‐3b02‐593c‐9477‐599f7c4543e9.html 

5. Firearm industry: http://www3.nssf.org/share/pdf/2017_Economicimpact.pdf 

6. Tobacco industry: https://www.wsj.com/articles/u‐s‐tobacco‐industry‐rebounds‐from‐its‐near‐ death‐experience‐1492968698 

7. Lockheed martin statistics: https://www.reuters.com/article/us‐lockheed‐results/lockheed‐martin‐revenue‐beats‐outlook‐strong‐for‐2018‐idUSKBN1FI1I2