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Sorry, Vector Group Dividends Are Not Sustainable.

|Includes:AGNC Investment Corp. (AGNC), FSC, VGR

On February 3, 2012, I wrote about three sustainable picks for laid-back dividend investing. The companies covered were:

  • American Capital Agency Corp. (AGNC);
  • Fifth Street Finance Corp. (FSC);
  • Vector Group Ltd. (VGR).
While I stand by my analysis with regard to AGNC and FSC, I'm afraid my laid-back attitude towards VGS has been a little bit too lazy. I apologize for the inconvenience.

I was looking for high dividend yield companies, operating in different sectors, which have sustainability of dividends.

I had Vector Group on my watchlist for quite some time and I felt comfortable with its constant quarterly dividend. True, its dividends have been sustained. Unfortunately, as user jdh44 makes clear with his comments, I fear those dividends are not sustainable. Oops.

I frantically looked for and then perused VGR's last Annual Report (2010), lest someone would actually buy some stock out of my previous article positive remarks.

On a positive note, Vector Group is a money-making company. From 2010 Annual Report:

Vector Group had a strong year in 2010, fueled by a growing tobacco segment and an improving real estate
segment. We continued to reap rewards from the strategic investment in our Pyramid brand. Our Liggett tobacco
business ended the year with 4.1% of the retail U.S. cigarette market, marking Liggett's highest market share in
25 years. We also saw positive signs in a still challenging, but improving, real estate market as our 50%-owned
Douglas Elliman real estate business generated record operating profit in 2010.
On a negative note, there are:
  • In the United States, tobacco products are subject to substantial and increasing legislation, regulation and
    taxation, which has a negative effect on revenue and profitability.
  • Cash interest expense of approximately $82.6 million and dividends on our outstanding common shares (currently at an annual rate of approximately $117 million) vs. 2010 operating income of $111.3 million.
  • Stockholders' equity is a negative -$46,234 million.
  • VGR is distributing more money than it makes. Data from the aforementioned annual report: Net income applicable to common shares was $ 0.71, while cash distributions declared per common
    share was $ 1.54.
If earnings don't sustain dividend payments, one might look at cash generation. Maybe they are paying dividends out of cash flow.
What I found out is that cash flow is positive, but cash comes from proceeds from issuance of debt.

What's in VRG's future? As far as I know, since it is a profitable company, a demise is not in order. They have to pay off their debt, though. A dividend cut - in half - looks now likely to me. VGR will then still be a dividend-paying company but its yield would not be high at current market prices.

To sum up: Vector Group pays out in dividends more than it earns. It is a conglomerate with tobacco as well as real estate businesses. It is a holding company which relies on payments from subsidiaries to pay its dividend. It's got a big debt load so it devotes quite a big chunk of gross earnings into interest payments. On the face of the latest annual report available, if one subtracts issuance of debt from cash flow, cash flow is negative.

True to my opening statement (see my previous Seeking Alpha article), laid-back dividend investing means that I don't want to spend too much time researching dividend-paying companies. This is my attitude with regard to high-yield dividend investing. If a company is too difficult to understand, then I leave it alone. And that's exactly what I should have done with VGR.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: AGNC, FSC, VGR