Is This the New Sin Stock Kingpin?

There's something about sin stocks that arouse both great passion and great profits. For decades, anti- tobacco crusaders railed against Altria , even as it (as Philip Morris) became the best-performing stock of the latter 20th century. But smoking rates have also been in decline, and there are legitimate questions over whether a company locked into the American market can continue to beat the odds. Where else can we look for long-term returns from a product the world can't seem to quit?

The alcohol industry could be the answer. Alcohol consumption has actually remained rather stable in the United States for decades -- although consumption peaked at almost 2.8 gallons of ethanol per person in the early '80s, it was most recently reported at 2.3 gallons per person in 2009. But what's important is which type of booze gets the most tipples, and this data from the National Institute on Alcohol Abuse and Alcoholism should show you where the money lies (I recognize the irony of using data from an anti-alcohol think tank to suggest an investment in that industry, so there's no need to point it out):


Source: National Institute on Alcohol Abuse and Alcoholism .


Spirits have fared the worst of the three major types of alcoholic drinks over this long time frame, but there's really no sense in investing in something now based on where it was in 1977. What we want to see is a positive trend closer to the present. Beer doesn't have such a trend -- in the past decade, its volume has declined by 5%. Wine has made strong gains, as it now moves 23% more volume than it did in 1999, but there aren't a lot of ways to invest in that industry (Altria, which owns the Ste. Michelle wineries, is one lesser-known opportunity). Hard liquor, with a 17% volume increase in the past decade, is close on wine's heels -- and there is one major investment opportunity in that industry: Diageo .

Hard liquor may not be king in America, but Diageo is an international company with a slew of world-famous brands that are found in bars and liquor cabinets around the world. And in the rest of the world, liquor is king:

Region

Consumption Per Capita

Beer Consumption

Spirits Consumption

Africa

6.15 liters

34%

12%

Americas

8.67 liters

55%

33%

Eastern Mediterranean

0.65 liters

38%

25%

Europe

12.18 liters

37%

25%

Southeast Asia

2.20 liters

26%

71%

Western Pacific

6.23 liters

36%

54%

World Average

6.13 liters

36%

46%

Source: World Health Organization . Data is best estimate to 2005.

There remains significant upside in the Southeast Asian region and the Western Pacific, which include high-growth engines China (categorized in Western Pacific) and India (in Southeast Asia). Diageo points out that the demographics in this region are in its favor, as the company boasts a 30% share of a market that grows by about 50 million drinkers per year. Of its major operating segments, the Asia-Pacific region isn't even the fastest growing (yet):

Diageo Regional Operating Segment 

2011 Net Sales*

2012 Net Sales*

Year-Over-Year Growth Rate

North America

3,366

3,556

5.6%

Europe

2,703

2,949

9.1%

Africa

1,357

1,447

6.6%

Latin America

1,063

1,239

16.6%

Asia Pacific

1,377

1,501

9%

Source: Diageo annual report.
*Financial results in pounds sterling.

The long-term potential for growth appears quite strong, not only in Asia but also throughout the rest of the world. There also appears to be little stomach for stricter government regulation than is already imposed on the liquor industry, as opposed to the gradual noose-tightening enacted on tobacco companies around the world. Diageo has enjoyed the embrace of sin stocks more than any of its peers which have all (with one exception) beaten index returns over the past five years:

DEO Total Return Price Chart

DEO Total Return Price data by YCharts

That's right -- Diageo even comes out ahead of longtime sin stock kingpin Altria on a recent timeline, and with far greater global tailwinds behind it than its America-locked sin cousin, Diageo should be able to maintain this advantage going forward. As a defensive stock with a product people often turn to in bad times as well as good, there's little reason to expect it to fall farther than the indexes when the next inevitable downturn takes a bite out of the market. Either way you slice it, Diageo seems to be a suitable stock to stick in your portfolio for the long haul.

Altria has been the best-performing stock of the past 50 years, but as the number of smokers in the U.S. continues to steadily decline, is Altria still a buy today? To find out whether everyone's love-to-hate dividend stock is a savvy investment choice or a hazard to your portfolio, simply click here now for access to The Motley Fool's premium research report on the company.

The article Is This the New Sin Stock Kingpin? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more insight into markets, history, and technology. The Motley Fool recommends Diageo. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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