Are Sin Stocks the Answer to Beating Inflation in 2022?
In a world where Environmental, Social and Governance (ESG) factors are playing an increasingly significant role in where investors place their money, the prospect of investing in sin stocks – such as alcohol and tobacco companies - may seem slightly taboo.
However, as inflation around the world runs red hot and central banks mull the prospect of interest rate hikes, so-called sin stocks meet many of the requirements which investors look for during such uncertain times.
So, what are these requirements? Whilst they will be different from investor to investor, we can highlight three things that most will be looking for in the current climate.
Firstly, and perhaps most importantly, investors are looking for reliable businesses which will perform well and continue to generate cash flow regardless of the overriding economic environment; they seek predictability amidst the uncertainty.
Secondly, as inflation rises so too do input costs for businesses, if a business cannot pass these rising costs onto the consumer, then their profits will be reduced. Investors, therefore, seek companies with strong pricing power who can raise prices if they need to.
Thirdly, stocks which pay a decent dividend are a huge plus. Inflation erodes the purchasing power of your money, regular dividend payments combined with capital growth work together to offset this impact.
Three requirements, three ticks for sin stocks.
Demand for the majority of products produced by sin stocks is inelastic. In other words, regardless of what is going on in the economy, people who are so inclined will continue to smoke and drink, and will weather almost any associated price rises which may come their way. Furthermore, thanks to the healthy cash flows associated with producing such products, many sin stocks are reliable and generous dividend payers.
Take British American Tobacco (BAT), for example, whose current dividend yield is 6.4%. Not only did the cigarette manufacturer recently increase its annual dividend, something which it has done for more than 20 years, but it also announced a $2 billion share buyback programme – a sign of a confident company with a strong cash flow.
Moreover, the tobacco stock has considerably outperformed the market so far this year, gaining more than 23% year to date compared with the FTSE 100’s 1.4% rise.
Sin stocks such as BAT could be poised to continue to benefit from a shift in investor behaviour this year and may prove to be a way for investors to beat inflation in 2022.
Of course, there are risks associated with investing in such companies. Continuing with the example of tobacco, the industry faces constantly changing regulatory requirements and increases in taxes and restrictions on their products. Additionally, the well-publicised detrimental health effects of cigarettes have successfully led to a decrease in the number of smokers around the world.
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