Vector Group Ltd. (VGR), through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States. It offers cigarettes in approximately 160 combinations of length, style, and packaging, under the Liggett Select, Grand Prix, Eve, Pyramid, and USA brand names, as well as under various partner and private-label brands.
Unless you're a serious smoker, you probably have not heard or seen these brands around much. This is primarily because Vector has very small market share (estimated to be under 5%). Companies like Altria (MO) and Reynolds American (RAI) are market leaders and hold by far the largest market share.
The main reason I do not like Vector is because of its dividend. It pays almost a 9% dividend. What's not to love? Well, the issue is that it pays out more than it takes in -- a business model even a 5-year-old can tell you is unsustainable.
Here is an overview of their cash flows and dividends paid in the last three years (all numbers in $ and thousands):
| 2010 | 2009 | 2008 | |
| Free Cash Flow | 43,613 | 1,819 | 84,956 |
| Dividends Paid | 117,459 | 115,778 | 103,870 |
Just by observing this you can see the dividends paid are huge. They do not have the cash flow to justify such investments. There are much better companies in the cigarette space with larger market share. They may pay a smaller dividend than Vector, but at least they can fully cover it.
Here are some companies I do recommend:
Altria is basically the largest in the U.S. Whether you smoke or not, you are probably familiar with most of its brands. The company has a strong history of paying dividends. The stock currently yields 5.7%.
Phillip Morris International (PM) was spun off from Altria (formerly Phillip Morris Cos.) in 2008. The great thing about PM is that it is an international brand, with strong exposure to India and China. Though cigarette sales in the U.S. have been flat, sales in India and China have been strong. Cigarettes are very popular in Asia. The stock yields 3.6%.
Reynolds American is also a great company with strong brands. Camel is one of its premier brands. The company has a strong history of paying dividends. The stock currently yields 5.7%.
One major thing to note with these cigarette companies is that there tends to be a large amount of litigation between them and the government. I am concerned for a company like Vector in a scenario like this. The company's dividend is not sustainable, market share is limited, and cigarette sales have been stagnant. If you want exposure to the cigarette sector, buy the other stocks I mentioned above.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
