- VGR is offering over 7% annual dividend returns.
- Financial metrics of the company show warning signs.
- Can a company succeed in tobacco and real estate at the same time?
- Concluded that VGR is not a SWAN (Sleep Well At Night) stock at the present time.
Vector Group Ltd. (NYSE:VGR) was listed in Fredrik Arnold's article on sin stocks dated 10/18/2014. It got my attention because of the 7.85% dividend return at its current selling price. With this kind of delicious return, I researched the company to decide whether the company warranted a Buy. The following article condenses my research on the firm.
VGR is a holding company which operates in tobacco and real estate. The company makes many private and low-priced brand cigarettes from which it derives 63% of its business. The rest of VGR's business comes from real estate through New Valley Corp. which has interests in real estate firms, hotels, office buildings, condos and apartments. Management states that 2013 was a transformational year, since it increased its ownership stake in Douglas Elliman Realty, LLC, the largest residential brokerage in the New York metropolitan area, from 50.00% to 70.59% and the introduction of Eagle 20s, a deep discount cigarette brand and Zoom e-cigarettes. New Valley Corp. also invested approximately $75 million in non-consolidated real estate investments.
VGR, the 4th largest producer of cigarettes, has a $0.62 price advantage per pack when compared to the 3 largest U.S. tobacco companies. This is the result of the Master Settlement Agreement between government and tobacco. Other small cigarette firms also have this price advantage, but VGR maintains that it has quality advantages over these smaller companies. The company also pointed out that the Tobacco Transition Payment Program expires this year and could yield as much as $28 million increased cash flow as a consequence. The management team and directors of the company appear to have confidence in the company with approximately 17.3% of outstanding shares. The graph below shows VGR's domestic market share and tobacco adjusted EBITDA for the past 16 years:
VGR's real estate business is relatively new and harder to understand. The company, through its New Valley Corp subsidiary, has purchased almost ¾ of Douglas Elliman Reality, LLC. Elliman had $436.9 million in revenues and nearly $46.6 million EBITDA for fiscal year 2013. New Valley has quite a number of other real estate investments in the US and abroad. These investments run from a 2.5% to 100% interest in various developments and hotels. Examples include a 49% interest in redeveloping the Coral Beach and Tennis Club in Bermuda to a 5% interest in a luxury residential condominium located in the Flatiron District of Manhattan.
The 2005 merger between Vector and New Valley created a strange marriage between 2 businesses that are very different and require different sets of skills to run them successfully. The merger between VGR and New Valley Corp. looks like it was completed so the management of New Valley could milk the free cash flow from Vector's tobacco business in order to finance the company's real estate ventures. Senior management has more experience in real estate and finance than it does in the manufacture and distribution of cigarettes.
The list of executives includes Howard M. Lorber: President & CEO who previously was President, CEO & Director of New Valley Corp. from 1994 to 2005 when it was merged with VGR. He has been Chairman of the Board and Director to various other companies over the past 20 years, some of which were in real estate and finance. Richard J. Lampen: Executive Vice President who was Executive Vice President of New Valley Corp. from 1995 to 2005, until it was merged with VGR. He is currently President & CEO of Ladenburg Thalmann Financial Services and Castle Brands Inc. a developer & importer of premium spirits. Marc N. Bell: General Counsel & Secretary was also with New Valley Corp. in the same position prior to the merger. Prior to joining New Valley, he practiced bankruptcy, corporate and real estate law in PA., NY., NJ., DC and FL. The top 5 executives were paid over $10 million last year, with Howard Lorber getting nearly $7 million. These figures were rather high for this small company, especially when compared to National Retail Properties (NYSE:NNN), a REIT which has a market cap twice as high and a forward P/E of 16, only paid its executives just short of $9 million with its Chairman and CEO receiving $3.4 million.
Looking at the various metrics of the company makes a fundamental investor like myself nervous. For example, VGR has a negative book value of $0.98 per share. It has a trailing P/E of 51 and no guidance for the coming year. The company has 97.5 million shares outstanding and a float of 62.5 million shares, of which 11.5 million were sold short as of 3/30/2014. Insiders have sold 1 million shares over the past 6 months, and various institutions and mutual funds have sold nearly 3 million shares over the past 6 months. Independent rating agencies such as The Street and Ford Equity Research have a Hold on the stock. S&P does not rate the stock, but maintains that the tobacco industry looks to be in a position to increase profits over the next year. The Motley Fool issued an article on 3/18/14 suggesting that VGR was a buy on the basis of its tobacco profits. However, the article barely mentioned the real estate side of the company, which is using more and more of the company's available cash.
This stock is definitely not a Sleep Well At Night (SWAN) investment. While it offers a fine dividend return at over 7%, it also presents some worrisome metrics. Furthermore, there is also the very precarious nature of the tobacco industry. If I were to purchase this stock, I would be watching it every day to see if some new government tax or regulation is going to sink the tobacco industry. While it appears that governments have decided to allow the cigarette and tobacco industry to survive, one or a few vocal reformers could change that overnight. I also have concerns about the company's real estate investments. While management has spread its investments over many projects all over the world, many of them are dependent upon the high-end hospitality industry. It is difficult to calculate the value of these investments and to estimate the expected returns from them, since most of them are being managed by another entity or corporation. An additional worrisome issue is the lack of any projections about future real estate results, while at the same time, management is selling shares. I have concluded that VGR may be fine for the risk-taker and the day-trader, but not for the long-term dividend-growth investor. This investment carries too much negative baggage for me to be an investor.