Tobacco was always the best ‘sin’ sector for investors to invest their cash in days gone by, and it was as far as I was concerned. But boy, things have really changed over the past half decade.
I used to hold shares in Imperial Brands (LSE: IMB). I loved the brilliant earnings growth that the addictive nature of its products always delivered, and thus the company’s ability to keep paying increasingly large (and impressively huge) dividends.
It appears as if these profits powerhouses are well past their sell-by date though, the restrictive legislative measures that have hampered earnings growth in recent years — like public smoking bans and restrictions on the marketing of tobacco products — now being rolled out to cover non-combustible products like e-cigarettes too.
I sold out of Imperial Brands given that the earnings-generating power of its sinful products is locked in a tailspin. If you’re seeking the security that this FTSE 100 giant used to provide, you’d be much better buying these FTSE 250 heroes, in my opinion.
Greene giant
Britons are becoming more and more cautious with their cash, a trend evident in data last week from GfK. Not only did its UK consumer confidence index fall again in June, but its savings index rose for the third consecutive month, illustrating the growing storm Britons are preparing for.
These rising pressures on shoppers’ confidence and spending power certainly aren’t derailing trading over at Greene King (LSE: GNK). Indeed, the business managed to outperform the broader market in the most recent fiscal year (to April 2019), thanks in part to improving sales momentum across its pub estate.
I’m not going to pretend that revenue growth of 1.8% for the last year is spectacular, but it did allow profits to grow again and as a consequence, dividends grew too. And I think investors can be confident of more progress on these two fronts as well, given Greene King’s improving top-line progress and the impact of rampant cost reduction on earnings.
City analysts agree and as a consequence investors can tap into a jumbo 5.3% forward dividend yield.
A sweet selection
AG Barr (LSE: BAG) is another ‘sin’ stock thriving in the current environment.
I’ve long lauded the immense strength of its labels in keeping sales on an upward slant, even in spite of the rising pressure on spending power in the UK. But news has emerged which could give earnings an added shot in the arm in the years ahead.
Amid much controversy Boris Johnson, the frontrunner to become the next prime minister, has touted the possibility of rolling back the so-called sugar tax. This particularly levy has, of course, caused drinks manufacturers like AG Barr to spend a fortune on reformulating their drinks recipes to reduce their considerable liabilities to the taxman.
Irrespective of the future of this particular sin tax though, I’m confident that the evergreen popularity of Irn Bru and others should keep powering profits growth at AG Barr for many years to come, and should power the firm’s long-running progressive dividend policy too. A forward yield of 1.9% might not be the biggest, but I’d happily buy this FTSE 250 share today and hold it forever.
