Investors clutch on to ‘sin stocks’ despite green push

Reliable returns and chunky dividends are hard to resist, writes Lauren Almeida

DIY investors have turned to “sin stocks” to protect their savings from market volatility, despite the efforts from fund managers to direct more money into greener, socially responsible sectors.

Tobacco firms Imperial Brands and British American Tobacco rose up the ranks of the most popular holdings on the broker Interactive Investor, at 32nd and 29th respectively, from 40th and 44th a year earlier.

Drinks maker Diageo, which owns brands such as Guinness, ranked 22nd, up from 24th, while weapons manufacturer BAE Systems was 27th. Meanwhile on rival AJ Bell, oil giants Shell and BP were the eighth and ninth most popular buys this week.

Global stock markets have been choppy this year, as investors adjust to high inflation and interest rate rises. The FTSE 100, which tracks the largest companies in Britain, has gained just 0.5pc since the beginning of January, while the US market index, the S&P 500, has fallen 6pc.

But London’s sin stocks have delivered. Over the past year, they have beaten the FTSE 100 by a wide margin: BP led the pack, up by 44pc, followed by Diageo, which has risen 30pc.

Such companies are often screened out of “ESG” funds, which commit to environmental, social and governance criteria. The popularity of such funds has also shot up. In November, two in every three pounds invested went into ESG funds, according to the Investment Association, a trade body.

Tom Sparke, of the wealth manager GDIM, said investors should back sin stocks, given their resilience against inflation and ability to pay income.

“Tobacco stocks have appealing dividends, which are useful in times of rising interest rates,” he said. British American Tobacco and Imperial Brands boasted dividend yields of 6.8pc and 7.9pc respectively.

“Demand tends not to waiver with price inflation. Also, alcohol-makers such as Diageo should be expecting an uptick in sales as entertainment and leisure activities increase.”

Chris Beckett, of wealth manager Quilter, said the addictive nature of tobacco and alcohol was the root of their exclusion from ESG funds. However, this made them more reliable.

“In the US, the biggest part of the market is tech stocks which are expensive because investors expect big profits. But with companies such as Diageo, you know that people will want Guinness today. That means there is more reliability in its valuation,” he said.

“Sin stocks hold up better when times are uncertain. They are more predictable than most industries – you know people will drink and smoke whatever the economic conditions.

“British American Tobacco and Imperial Brands have also been paying down their debts, and look like they are getting back towards the point of share buybacks. We think that should be coming by the end of the year.”

Tineke Frikkee, of the investment manager Waverton, agreed that Diageo was a compelling buy.

“It is growing its portfolio of low and no-alcohol products, offering healthier alternatives. The ESG commitment is strong: it is actively promoting ‘drink sensibly’ campaigns, so is transparent about the risks of consuming its products.”

Mr Beckett said he preferred British American Tobacco over Imperial Brands, because of its plans to transition away from traditional smoking towards vaping products. “In my view, BAT is further down the line in that transition. If it gets it right, the shares will deserve a higher rating,” he said.

Meanwhile, profit margins at Shell and BP stand to gain from rising oil prices. Analysts expect the commodity to reach $100 (£74) per barrel by the end of the year, up from $89, as demand rebounds and geopolitical tensions cause supply disruption.

ESG funds typically exclude oil and other commodity companies because of their environmental impact.

However, Simon Murphy, who manages the ethical Tyndall Real Income Fund, said he invested in BP because it was in the process of pivoting towards a greener business model.

“We take issue with the notion that all investment in fossil fuels should be stopped,” he said. “The transition to ‘net zero’ is fiendishly complicated and, as much as we all would like it to happen seamlessly and quickly, the reality remains that fossil fuels will be part of the energy mix for a significant period.”

For DIY investors seeking exposure to companies in the oil, tobacco and alcohol industries, Mr Sparke recommended Man GLG Income and Artemis UK Select. Both have delivered returns of more than 40pc in the past five years.

‘With Diageo, you know people will keep wanting Guinness’

‘Sin stocks’ have soared above the market Lucky Strike is owned by BAT, a British ‘sin stock’ growing in popularity with DIY investors