What Are Sin Stocks?

August 19, 2021 12:27 UTC

In recent years, there has been an increasing amount of importance placed on Environmental, Social and Governance (ESG) factors when making an investment. However, there are many people who have far less qualms when it comes to their investments, so long as it provides them with healthy returns.

In this article, we will be examining sin stocks, providing a definition of this term as well as the advantages and disadvantages associated with these types of investments. We will then look at two types of so-called sin stocks, together with examples which you may want to consider adding to your portfolio in 2021!

What Are Sin Stocks?

Standing in contrast to ethical investments, sin stocks represent the shares of companies which are engaged in, or associated with, sectors considered to be immoral. Whilst proponents of ethical and socially responsible investing seek out investments which tend to provide a benefit to society, sin stocks are often perceived as profiting from human weakness and vice.

Traditionally, the sectors associated with sin stocks include alcohol, tobacco, weapon manufacturers, adult entertainment and gambling. However, what is and is not “sinful” is fairly subjective and, therefore, people’s perceptions of sin stocks can vary.

For example, purveyors of fast-food usually escape the label of sin stock, but considering that their unhealthy products directly contribute to the growing levels of obesity throughout the world, many would argue that they should be categorised as such.

Advantages of Investing in Sin Stocks

Although some investors may be morally adverse to investing in sin stocks, we can identify a couple of benefits associated with doing so.

Firstly, due to the simple fact that sin stocks are often overlooked by retail investors, institutional investors and fund managers because of their negative perception, they can be undervalued. In other words, their share price is not reflective of the value which they offer their investors. Many sin stocks are well-established companies, with strong financials and which pay generous dividends to their shareholders, however, this is not always reflected in the price.

Secondly, demand for many of these companies’ products tends to be inelastic, meaning that their customers will continue to consume them regardless of the economic climate or any other factor which may usually affect demand. This makes many sin stocks relatively recession proof, at least when compared to other stocks.

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The Drawbacks of Sin Stocks

As well as providing some advantages for investors, sin stocks also come with several clear disadvantages.

Due to their nature, sin stocks face greater political and regulatory risk than other investments. They tend to face a constantly evolving regulatory landscape, as lawmakers attempt to dissuade consumers from buying their products.

Take cigarettes for example. Ever since the negative health effects of smoking have become public knowledge, tobacco companies have faced a continual barrage of restrictions placed on their products. In the UK, tobacco companies firstly had to put health risk warnings on the packet, then pictures depicting these risks, then the legal age to smoke rose from 16 to 18, then they were all forced to sell cigarettes in the same plain box and so on - and this continues today and will continue for as long as people smoke. We could draw similar comparisons with alcohol, gambling and so forth.

Furthermore, sin stocks can be subject to increased taxation by the government. This tax is intended to be a further method of discouraging consumers, however, it also helps to generate tax revenue which can be used to combat any negative societal effects generated by consumption of the product.

In the following sections, we will take a look at a few specific examples of so-called sin stocks which you may wish to consider investing in. That being said, for the purposes of this article, we are using the traditional definition of what constitutes a “sin stock”. Any industry or company’s inclusion should not be perceived as a negative judgement on our part on these industries or on anyone who decides to invest in them.

Alcohol Stocks - Diageo

During the coronavirus pandemic, as many industries struggles, for some types of alcohol, sales actually increased, allowing many alcohol stocks, such as Diageo, to recover fairly quickly form the initial economic shock.

Depicted: Admirals MetaTrader 5 – Diageo Weekly Chart. Date Range: 21 March 2010 – 18 August 2021. Date Captured: 18 August 2021. Past performance is not a reliable indicator of future results.

Diageo is one of the largest producers and distributers of alcohol in the world, operating in more than 180 different countries and owning a number of world renowned brands, such as Guinness.

According to their recent results, for the year ending 30 June 2021, sales, net sales and Earnings per Share (EPS) increased by 8.2%, 8.3% and 89.4% respectively after disappointing figures the year before.

Its share price has also performed well in 2021, having increased by 25% since the beginning of the year (as of 17 August), reaching an all-time high on 13 August 2021 of 3,640p along the way.

The company has acquired, and continues to acquire, big named alcohol brands which enjoy considerable brand loyalty around the world – such as Smirnoff vodka and Johnnie Walker. Diageo also pays a respectable dividend, which, at the time of writing, has a yield of around 2%.

Furthermore, despite possibly being viewed by some as a sin stock, Diageo is committed to ESG principles, having reduced their direct carbon emissions 50% since 2008 and also consistently ranking highly for their hiring policy’s diversity and inclusiveness.

Tobacco Stocks – British American Tobacco

Historically, the tobacco industry has produced some of the best performing stocks in the world. However, as mentioned earlier, for the last 50 years or so, the industry has faced an onslaught of regulations and taxes designed to limit consumption.

Regulations continue to increase and, more importantly, smoking rates are declining around the world as younger generations become increasingly conscious of the adverse health effects of smoking.

Despite falling cigarette demand, tobacco stocks remain attractive to many investors because of their history of reliable profits and dividends.

Depicted: Admirals MetaTrader 5 – British American Tobacco Weekly Chart. Date Range: 21 March 2010 – 18 August 2021. Date Captured: 18 August 2021. Past performance is not a reliable indicator of future results.

In terms of net sales, British American Tobacco is the largest international tobacco company in the world.

Like other tobacco companies, in an effort to change with the times, British American Tobacco has turned their attention towards new non-combustible products, such as vaporisers, which are increasing in popularity.

In its full year results for 2020, the company recorded revenue of £25,776m an increase of 3.3% year on year (YOY). Profit also increased by 4.8% YOY coming in at £11,365m. Despite revenue from cigarette sales falling 4.6%, total revenue from their non-combustible products rose 11.3%.

British American Tobacco share price, however, has not performed well over the last few years. After reaching an all-time high of 5,639p in June 2017, the share price fell rapidly and for the last couple of years has been moving laterally, currently trading at around 2,700p.

However, its increasing sales of non-combustible products and the fact that British American Tobacco stock currently has a dividend yield of around 8%, make this a sin stock which is worth considering.

How to Buy Shares With Admirals

With an Invest.MT5 account from Admirals, you can buy both shares examined in this article, as well as from over 4,300 other listed companies around the world!

In order to buy shares with Admirals, register for an Invest.MT5 account and then follow these steps:

  1. Download and log in to the MetaTrader 5 trading platform
  2. Head to the Market Watch window on the left of the screen, search for the stock you with to purchase and select it in order to add it to Market Watch

Depicted: Admirals MetaTrader 5 – Market Watch

  1. Right click on the symbol within the Market Watch window and select ‘Chart Window’ in order to open a price chart
  2. Select ‘New Order’ at the top of the screen to open an order window, as shown below. Here you can select the amount of shares you wish to purchase before selecting ‘Buy’ to send your order to the market!

Depicted: Admirals MetaTrader 5 – British American Tobacco Daily Chart. Date Range: 17 June 2020 – 18 August 2021. Date Captured: 18 August 2021. Past performance is not a reliable indicator of future results.

Investing With Admirals

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Roberto Rivero
Roberto Rivero Financial Writer, Admirals, London

Roberto spent 11 years designing trading and decision-making systems for traders and fund managers and a further 13 years at S&P, working with professional investors. He has a BSc in Economics and an MBA and has been an active investor since the mid-1990s