Investors Quit Tobacco. Why Not Alcohol?

Some sin stocks seem to be more forgivable than others. Investors’ preference for alcohol over tobacco is a puzzle, even if it shows little immediate sign of change.

The tobacco sector shows how quickly popular investments can drop in price if regulators decide to crack down on addictive consumer products. Five years ago, major tobacco stocks were trading at an average of 19 times expected earnings, having generated total annual shareholder returns of over 20% since 2000 — more than four times the average. average of the S&P 500. They have since tumbled and are now consumed only 11 times because of the threat of stricter tobacco laws, including recent proposals to ban menthol flavors in America

Can the same thing happen with alcohol? Drinking a few drinks isn’t as bad for your health as smoking, and tobacco companies clearly sell a more toxic product. Globally, eight million people die each year from tobacco-related diseases. But drinking is also a big problem, causing three million deaths annually, according to the World Health Organization.

Factor in the total social cost of both products including things like crime, traffic accidents and lost productivity, and the narrowing gap between tobacco and alcohol. According to the World Health Organization, tobacco-related problems consume 1.8% of global gross domestic product. A study by the Organization for Economic Cooperation and Development found that drinking too much alcohol reduces GDP by 1.6 percent.

Investors now consider alcohol depots to be significantly less toxic than tobacco. Based on an analysis of funds with at least 200 holdings, only 2.5% of global assets under management exclude alcohol companies from their portfolios, compared with 11.5% for tobacco companies, according to estimates from data analytics provider Ethos ESG. Other controversial industries such as gambling and pornography fall somewhere in between.

And when it comes to valuing wine stocks, the harder the better. Stronger liquor stocks are valued at a premium to companies that produce lower-strength spirits such as beer due to better sales growth in the past. Major distillers such as tequila maker Casamigos Diageo and Remy Cointreau trade on average 26 times projected earnings, compared with 18 times for global brewers. This contradicts the way many governments treat spirits more for tax purposes. In the US, for example, the federal tax on alcohol is $13.50 a gallon compared to just $0.58 a gallon for beer, according to data from The Tax Foundation.

Drinking is less stigmatized than smoking in many of the world’s largest economies, which may explain why the two industries are viewed differently. The economic activity and jobs created from drinking in bars and restaurants are not really equivalent in the tobacco sector. And tobacco companies have poisoned relationships with regulators by trying to hide the health effects of smoking for decades.

Without a cultural shift in how society perceives drinking, the risk that many investors will divest into alcohol stocks seems low. Higher taxes on alcohol are a more real threat. The World Health Organization (WHO) recommends that authorities charge at least 75% of the total cost of a pack of cigarettes. Lighter alcohol burden: On average, taxes account for 28% of retail prices in advanced economies, the Jefferies analysis shows.

The FDA is working on a plan to ban menthol cigarettes, which it says are harder to quit. The WSJ’s Jennifer Maloney explains why the Biden administration wants to block their sale and why critics say the ban could have unintended consequences. Illustration: Jacob Reynolds

In February, WHO launched an initiative to encourage countries in Europe, the region with the highest per capita alcohol consumption in the world, to increase the tax they must pay on alcohol. It is estimated that a minimum tax of 15% on the retail price per unit would reduce alcohol-related deaths by about 1/10 in Europe.

This could affect beverage companies exposed to markets like France and Germany, where beer taxes can be as low as 7%. The Russian market is a prime example of what can happen when taxes rise. Bernstein noted that beer margins in Russia fell from 16% in 2010 to 9% about a decade later as higher taxes made products more affordable.

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Luckily for investors, politicians find it harder to raise taxes on beverages than on tobacco in most countries. First, higher prices impact more people — seven in 10 Americans drank in the past year in the latest survey by the National Institute on Alcohol Abuse and Alcoholism, while smoking rates drugs in the US has dropped to just 13%.

Alcohol companies are also wiser than tobacco businesses in dealing with regulators and spending a portion of their advertising budgets promoting responsible drinking. The promotion of alcohol-free products, as well as the trend toward premiumization, whereby consumers in mature markets are drinking more expensive but less alcoholic wines, will help protect the food industry. drink from criticism. By 2025, Budweiser Anheuser-Busch InBev wants one-fifth of all drinks it sells to be low- or no-alcohol.

Beverage giants such as AB InBev and Heineken admit that irresponsible drinking is one of the biggest threats to their businesses. So far, they are managing risk well. Their stocks may not reflect that today, but the liquor companies have more in common with tobacco than investors like to admit.

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https://www.wsj.com/articles/investors-quit-tobacco-why-not-alcohol-11653643805?mod=rss_markets_main Investors Quit Tobacco. Why Not Alcohol?

Edmund DeMarche

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