Tobacco, alcohol stocks healthy for investment portfolios

The tobacco, casino and alcohol industries are often shunned due to their detrimental effects on people, but analysts say the players in the so-called sin industry are shining stars on the stock markets amid low-yield market conditions.

Shinyoung Securities selected a set of vice stocks including tobacco, alcohol and gambling companies as its favorite picks last week. The brokerage house cited positive growth prospects considering the high market entrance as well as favorable dividends.

“The products and services from the sin industry often entail addiction and the aspect translates into a factor driving steady growth,” said Kim Yun-oh, a researcher at Shinyoung.

Tobacco manufacturer KT&G, for example, has enjoyed constant growth in the stock market since it was listed on Kospi in 1999. The initial price was 36,800 won ($33.60), but the company, the country’s leading tobacco company, traded at 123,000 won Tuesday.

For an investor who held the share from the beginning, the rate of return for KT&G, including dividends, stood at 327 percent while the average return rate for Kospi-listed stocks is 143 percent.

Shinyoung projected that casino operators Kangwon Land and GKL as well as KT&G will grow because they can benefit from their monopolistic position.

“Kangwon Land is the sole domestic casino complex accessible to Koreans and GKL is one of the two to serve foreign gamblers,” a Shinyoung report noted.

“The operators seek to reach a more diverse range of customers by adding resort and dining features to their complex,” it said. “Considering the high cash asset amounting to 2 trillion won, GKL will likely build a casino combined with resort facilities on Jeju Island.”

Since the industry is subject to government regulation, the price of “sin” products is bound to rise when the government seeks to further restrain people’s appetites for the products and services. “Alcohol, tobacco and casinos are all the subject of strong regulation,” Kim said. “When the government strengthens regulation on them it pushes up the price, which can be a good factor in terms of profit.”

But Kim noted that tobacco manufacturers and casino operators seek to expand their presence abroad to ease risks linked with local government regulation.

The sin industries tend to offer higher dividend payouts, a factor that could draw in investors hunting for high yields.

GKL’s return is 56 percent while KT&G’s is 54.6 percent, far higher than the Kospi average of 22.7 percent.

“[M]uch of the evidence that we review suggests that ‘sin’ pays,” a study by the Credit Suisse Research Institute and the London Business School found.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]