Vector Group (NYSE:VGR) is a company that has holdings in tobacco and real estate. They are mostly known for their deep discount cigarette brands. I decided to write this article based on the stock price going down in towards an area where it is a good buy, and it is there based on some not so great news last week.
Vector Group announced its first quarter results on May 3rd. The company showed a small drop in revenues ($257.6 million compared to $260.4 million). However, there was good news, with operating income increasing by $2 million, to $33.4 million. The big change on this quarter's results was the change in fair value of derivatives embedded within convertible debt, which increased to $21 million this quarter, compared to next to nothing in the first quarter of 2011. This pushed the stock EPS into negative territory, to $0.10 a share.
So why do I say a 12%-15% return every year on Vector Group? The stock has paid a consistent $1.60 per share dividend since 2000. They also give you 5% additional stock each year (which does dilute the shares). Also, the price for Vector Group stays quite steady, usually ranging between $15.50-$21 a share. Let's take an example if you bought Vector Group 5 years ago.
On May 8th 2007, you could have bought Vector Group for $18.20 a share. If you bought 200 shares on that date, your investment would be $3,640. Today, you would own 242 shares of Vector group, at a share price of $16.90 a share, which would be a value of $4,089.80. You would have also made $1,764.80 in dividends. If you sold that stock today, your total return would be 60.8%, which is about 12% a year. Of course you could also purchase this stock as a DRIP, and your gains would be larger.
There are some negatives about Vector Group, though I have not seen any effects from them yet. The big one that most people say is that their dividend is not sustainable, because they do not have the earnings to cover it. Well that is the truth, their earnings have not covered their dividend, and they haven't over the last 10 years (see below), but I get that check every quarter. The big positive I see in the income statement below is the sales increases since 2008 have been excellent.
INCOME STATEMENT: 10-YEAR SUMMARY
Conclusion: Vector Group is not for everyone. There are other tobacco stocks that have diversified holdings, and better PE ratios, such as Philip Morris International (NYSE:PM), Altria Group (NYSE:MO), Reynolds American Inc (NYSE:RAI), Lorillard Inc (NYSE:LO) and Universal (NYSE:UVV). Some of these stocks have shown tremendous growth in the past (Philip Morris being a great example), but none of these stocks match the cash payout every quarter that Vector Group provides. With the stock in the $16 a share price range, you can buy in now and reap a nearly 10% yield each year, plus add 5% of stock into your portfolio every year.
Additional disclosure: I may add to my VGR position if the price drops below 16.50.