In today’s issue:
- Vice industries are amongst the most defensive
- They tend to be both profitable and stable
- In many cases they also pay high dividends
I’ve written frequently in recent weeks about some principles and methods of defensive investing.
Some of these are fairly straightforward concepts.
Such as what sectors to avoid if seeking safety from an overvalued market at high risk of a correction.
Today, I’ll discuss one that is somewhat less conventional and indeed controversial: vice investing.
Join me, as I explain how it works…
We all have our peccadilloes.
Many of us spend at least some of our income on booze, betting/gaming, cigarettes and other vices.
Perhaps more than we care to admit.
Moreover, the amount we spend on our bad habits tends to be relatively stable. A bad habit is hard to shake, after all.
We might not think of having a monthly “booze budget”, yet for many, that is how they in effect behave.
Thus, vice-servicing businesses can be both profitable and stable. That’s an attractive combination for investors. Many are also highly cash generative and also pay generous dividends.
Now, I’m not advocating any form of unhealthy or harmful behaviour. But to be good investors, we need to learn to look at the world as it is, not as we wish it to be.
We should at least be aware if there is good value in a vice industry or company.
But not everyone does that. Indeed, many institutions have ESG – environmental, social and governance – guidelines explicitly preventing them from touching anything to do with vice.
That can result in vice companies trading at lower valuations than they otherwise would, given their attractive investment characteristics.
Think of vice investing as being the exact opposite of virtue-driven investing. The latter may be admirable and desirable from a moral perspective. But when it comes down to not overpaying for a company, virtue-driven investing can be a minefield.
If ESG-oriented institutions all chase the same “virtuous” companies in which to invest, they will drive valuations to unjustified levels. Certainly when compared to their underlying earnings growth potential.
This may help explain why, for example, ESG-oriented investing hasn’t performed particularly well over the past year.
Those investors who invested in vice industries instead could have fared significantly better. How much better?
Well, let’s look at the UK’s two big tobacco companies British American Tobacco (BATS) and Imperial Brands (IMB) for example. Over the past year they have performed well, rising by 48% and 57%, respectively. Notwithstanding that impressive performance, their forward implied dividend yields remain above the FTSE 100 average at 7.4% and 5.6%.
Meanwhile, a fund tracking the MSCI Europe ESG index (ESGL) has returned only 7%.
Source: Koyfin
Not only does that 7% trail far behind, it also trails the broader UK stock market. The iShares FTSE 100 tracker fund (CUKX) is up about 17% over the past year.
Many ESG-oriented companies are in relatively risky, emerging industries such as supposedly “green” or “renewable” energy. Vice firms are in most cases in established, mature industries. Indeed, when you think about it, vice industries are amongst the oldest in the world.
The Egyptians and Babylonians brewed beer. The Greeks and Romans made wine. Smoking is as old as the archaeological record, with wood, clay and bone pipes amongst the most common objects uncovered at prehistoric dig sites.
Again, bad habits are hard to shake, and some of them are very old indeed.
So old, in fact, we’re probably into a discussion of human nature at this point.
There are few things that are certain in investing, but one can be certain that human nature won’t suddenly change on a dime.
ESG or other investment trends, however, could well come and go in future with the frequency of ladies’ fashions or social fads.
But something tells me that vice will remain a profitable and relatively defensive place to invest for a long, long time to come.
Until next time,
John Butler
Investment Director, Fortune & Freedom
All Quiet on the Canadian Front
Bill Bonner, writing from Baltimore, Maryland
The trumpets blew. The bands were warmed up. Soldiers said goodbye to their sweethearts… hoping to come home heroes.
War!
“It’s the dumbest trade war in history,” says the Wall Street Journal, perhaps exaggerating. President McKinley’s tariffs were pretty dumb too. And let’s not forget Smoot and Hawley.
The latest irruption began on Saturday with bluff and bluster, as all wars do. Donald Trump said the foreigners were ‘ripping us off.’ He promised a swift victory that would make us all ‘as rich as Hell.’
Mr. Trump thinks tariffs will be a big winner because we’ll be taxing, not only residents of the US, but foreigners too. Why the foreigners will be willing to pay taxes to the US has yet to be explained.
But if there are any tariffs, Americans themselves are going to pay them – in the form of higher prices, fewer choices and growing poverty. Like taxes and inflation, tariffs are just another way to get wealth from ‘The People’ to the elites.
One of those elites was licking its chops yesterday. Here’s Fox:
‘America First’: Largest steel producer in US announces support of Trump tariffs
“Nucor applauds the first steps taken by President Trump in his America First Trade Agenda,” Leon J. Topalian, the chair, president and CEO Nucor Corp., wrote in a statement dated Friday that was obtained by Fox News Digital. “We look forward to working with President Trump to enforce our trade laws and strengthen American manufacturing!”
Classic win-lose politics. The few – steel company owners, its unions and its lobbyists – win. The rest of us pay higher prices.
But wait. What’s this?
We were just getting a case of war fever… our temperature rising as we awaited the Mounties attacking from the North, while Pancho Villa charged across the Rio Grande… when the wily Trump called it off. The Washington Post:
Trump halts tariffs on Mexico as it rushes troops to border
In a dramatic, last-minute move, the Trump administration agreed Monday to pause sweeping tariffs on Mexico for a month while the two sides hammer out an agreement on security and trade, the U.S. and Mexican leaders announced.
President Claudia Sheinbaum said on X that in a “good conversation” with President Donald Trump, Mexico committed to rushing 10,000 national guard troops to its border to try to block the flow of drugs into the United States — especially fentanyl.
An hour or so late, the New York Post:
Canada announces US tariffs on hold for 30 days after Justin Trudeau holds ‘good phone call with President Trump’
“Canada has agreed to ensure we have a secure Northern Border, and to finally end the deadly scourge of drugs like Fentanyl that have been pouring into our Country,” Trump announced on Truth Social, following the call with Trudeau. “Canada will implement their $1.3 Billion Border plan.”
Whew!
It turned out that the trade war was not a trade war at all… but just a new theater in the drug war!
The feds have been fighting since the ‘war on drugs’ was declared in 1971. That’s more than half a century in the trenches at a cost of more than $1 trillion.
We’ve grown old waiting for the victory parade. It never comes. Instead, there are said to be 1.5 million arrests for illegal drugs annually… a half a million people in jail on drug charges… and 80% of all opioids produced in the world are consumed by Americans.
But it’s an ill wind breaking across the Potomac that does no one good. The War on Drugs enriched both cops and robbers. Drug dealers enjoyed higher margins – since the feds, in effect, placed “tariffs” on drug imports, restricting supply. Private prison companies, too, enjoyed a huge boost. And the law enforcement industry at all levels – public and private – gained power and wealth they had never before thought possible. (The Drug Enforcement Agency has nearly 5,000 special agents, many of whom are bumping up against the fed’s $191,000 pay cap.)
Yes, there are winners and losers in trade wars, drug wars, and hot wars too. The winners are the usual ones – the ones who make campaign contributions and have lobbyists to whisper in the commander-in-chief’s ear. The losers are the usual ones too – ordinary citizens… the collateral damage, who pay higher taxes, higher prices… and some of them, the highest price of all.
And now, with Field Marshal Trump feigning an attack on the right, while he smashes into the enemy from the rear… zigging and zagging…
Leaving almost everyone confused and aghast…
All we know for sure is that there are bound to be more casualties.
Regards,
Bill Bonner
Contributing Editor, Fortune & Freedom
For more from Bill Bonner, visit www.bonnerprivateresearch.com
