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Sin stocks include companies that operate in the gambling, tobacco, alcohol, and weapons industries and are so called because they deal in products and services that are seen as harmful or dangerous to their customers. While these businesses put off some investors, sin stocks have historically had reliable customer bases and tend to be resilient in times of a downturn because of the natures of their products.
Owning these types of companies isn't for everyone, but for investors undeterred by the accompanying stigmas, the right sin stocks can have a positive impact on a portfolio. Here's why Anheuser-Busch InBev (NYSE: BUD), Philip Morris (NYSE: PM), and Las Vegas Sands (NYSE: LVS) are top sin stocks to buy in 2016.
Las Vegas Sands
Casino companies have faced turbulence in recent years because of declining overall traffic and economic and regulatory pressures in the crucial Chinese market. Despite this Las Vegas Sands looks like a stock with long-term turnaround potential. In Macau, a city in southern China that functions as a tourist and gambling hub, there have recently been some positive indicators that bode well for Las Vegas Sands' stock.
Revenue for August posted 1.1% year-over-year growth and snapped a 24-month streak of declining sales, and performance in September was once again positive, with 7.4% year-over-year growth. Las Vegas Sands derives roughly half of its operating profits from Macau-region resorts and is down more than 30% from its 2014 pricing high before China's gambling crackdown. An ongoing recovery in this crucial Chinese territory would probably be accompanied by meaningful share-performance boosts.
For income investors, Las Vegas Sands is especially worthy of attention, as it offers a substantial payout that yields roughly 5% -- well above the 2.1% average yield of dividend-paying S&P 500 companies. Las Vegas Sands has raised its payout for three years running and is likely to continue to make its yield a substantial component of owning its stock. However, investors should be wary of expecting the company to maintain its payout or deliver increases unless it manages to improve cash flow in coming years. The company's current dividend sees it paying out roughly 135% of trailing-12-month earnings, so investors should recognize the possibility of dividend cuts if the situation in China worsens rather than improves.
Las Vegas Sands is well positioned in the China market to capitalize on a rebound in the region, that fact plus the stocks dividend performance make this company a potenitally strong option for income investors who are bullish on an ongoing recovery in the space.
With awareness growing of the deleterious effects of cigarettes, Philip Morris has seen American market sales slip in recent years, but challenges in its core market are far from a death knell for the company. Philip Morris still has growth avenues in developing markets, where increasing populations and rising incomes look to boost consumption of its tobacco products, as well as its reduced-risk products.
Pressure on the company's core cigarette products are causing it to innovate, and luckily for Philip Morris investors, the tobacco giant seems to be making real progress in developing and marketing new alternatives. The company's iQOS Heatsticks take a novel approach to delivering a nicotine kick, with tobacco being heated as opposed to burned, for an experience that manages to be similar to smoking while also potentially less hazardous to consumer health. While projects like iQOS are increasing the company's research-and-development expenditures, early results have been promising, with iQOS already posting roughly 3% market share in Japan -- the only country in which they're available countrywide.
Like the other stocks on this list, Philip Morris stock also has a strong returned income component that adds to its attractiveness as a long-term, buy-to-hold prospect. The stock's yield sits at roughly 4.2%, and the company has delivered payout increases for eight years running -- which is every year since its split with Altria. With reduced-risk cigarettes expected to achieve breakeven in 2017 and profitability in 2018, and a non-capex-intensive business, Philip Morris' payout ratio of nearly 90% shouldn't present an obstacle to payout increases.
While tobacco and gambling companies are facing pressures that are threatening demand, there appears to be little in the way of comparable factors inhibiting the growth of beer consumption. For investors looking for a stake in the beer market, Anheuser-Busch InBev's scale advantages and policy of shareholder enrichment through returned income make it a top stock in the space.
The company is the largest beer brewing company in the world by production volume and distributes popular alcoholic beverage brands, including Budweiser, Busch, Becks, Corona, Stella Artois, and many others. All told, the company's portfolio of alcoholic beverages includes more than 200 brands, with 19 of them each generating more than $1 billion in annual retail sales. With AB Inbev's merger with SABMillerhaving recently been approved by shareholders, the resulting company will be by far the largest beer company in the world and create infrastructure advantages that would help improve profitability and facilitate ongoing expansion in Asian and African markets.
Looking at the stock's returned income component, AB InBev boasts a substantial 3.6% yield and has raised its payout for six years running. While the stock's roughly 113% payout ratio raises some concern about the sustainability of its dividend, the company's strong position in a recession-proof industry and potential for growth in emerging markets means that its current payout is far from the only reason to own the stock, even as it trades at roughly 26 times forward earnings projections.
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Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.