Granted, there can be exceptions to that rule. Thanks to the power of the morally self-righteous in the US - a country founded by people who tended to equate fun with sin - internet gambling operators such as PartyGaming (now part of bwin.party digital) came within an ace of going under in 2006 when internet gambling in the US was made illegal overnight. Closer to home, last October night clubs operator Luminar gave up after years of struggle, though it was slain not by rectitude and parsimony, but by cheap booze and relaxed licensing laws.
Even so, it generally holds good - selling fun/sin is profitable. When what's on offer is a non-discretionary product or service for which demand can be pretty well guaranteed, why wouldn't it be?
That being so, perhaps I should get a bit of fun into the Bearbull Income Portfolio. Whatever I might claim for the merits of the portfolio, having stakes in a collection of companies that do such mundane things as make animal feed stuff (Carr's Milling), generate electricity from coal (Drax) and clean offices (Mitie) hardly exploits the human propensity to spend hard-earned money on the sensual things of life.
Which is why an investment in the UK's biggest bookmaker, Ladbrokes, might fit the bill. Certainly, the shares carry the requisite yield - at 162p, they offer 5.3 per cent (and come with a 4.3p dividend in the price till 12 September). Not just that, Ladbrokes' results for the first half of 2012 demonstrate the resilience of its high street operations. The assumption is - or was - that the digital world of tablets and smart phones meant that the bricks-and-mortar estate was a relic. Not so. In the first half, group operating profits added almost £34m to £138m and the retail side contributed £21m of the extra.
True, the average stake placed in a Ladbrokes shop has not changed in two years and, at about £8.50, wouldn't even stretch to the cost of a pint and a packet of cigarettes. But (a) it's an indulgence that Ladbrokes' customers are loath to sacrifice to the angry god of recession, and (b) it's an amount that Ladbrokes' managers are better able to turn into good profits thanks to 'micro managing'.
That's a catch-all for such things as fine-tuning opening hours, promotions and staff levels shop by shop. It also includes better use of fruit machines. In the UK, machines have added £96m of extra revenue in the past two years and in 2012's first half accounted for £28m of the £33m increase in 'net revenue' (ie, gross winnings less some minor adjustments). That pace of growth from machines will slow, but Ladbrokes' bosses are sufficiently encouraged by the prospects for betting shops that this year they plan to add 60 to the 2,100-plus UK estate. It helps that, with short-term leases available, they can open a new shop for less than £200,000 and get a pay-back within three years.
And it helps the investment case that bookmaking is, or should be, a good cash generator. Certainly, in the past 18 months, Ladbrokes has cut its net debt through trading alone from £492m to £397m, even though capital spending has been high (it was £45m in the first half, two-thirds up on the previous first half). That gives scope for the dividend - likely cost this year, £78m - to climb some more before tracking changes to underlying earnings on a dividend cover of two times.
This makes Ladbrokes' shares a sensible proposition for an income fund. However, within the next 12 months, the share price is most likely to be determined by the group's progress on its 'digital' offering (ie, betting and gambling over the internet). As this service spreads to tablets and phones at an accelerating rate, Ladbrokes has fallen off the pace. Hence the sacking last week of Richard Ames, the director responsible for IT (see Bet on gaming winners). Chief executive Richard Glynn is defiant that Ladbrokes will get back on track, starting with the launch of a new digital sports book late this year. Then again, he would be. We outsiders will have to wait and see, though probabilities dictate that Ladbrokes is more likely to shift towards the industry average than further behind. And it hasn't stopped me buying 12,000 Ladbrokes' shares for the Bearbull Income Portfolio at a touch under 162p each. Then again, I've never had problems confusing fun with sin.
Meanwhile, the income fund faces another challenge - buying shares in Ladbrokes gives me another stake in a company that derives its revenues from non-cyclical demand comprising lots of small-ticket purchases, much like Glaxo, Vodafone, even electricity supplier SSE. That tactic has been fine for a world in recession. One day that will change and it will be right to have exposure to the cyclical, big-ticket side of the economy. Carillion, whose shares are in the portfolio, is towards that segment, but at some stage I will have to push further in that direction; into sectors such as real estate, civil engineering, perhaps even mining and oil exploration. More of that next week.
