By the Sure Dividend staff
Vector Group (VGR) is a unique investment opportunity for income investors.
What immediately stands out is the company's above-average dividend yield. Vector Group currently pays a quarterly dividend of $0.40, which yields 8.0% on the company's current stock price of $20.10.
This makes Vector one of just 428 companies in our investment universe with a dividend yield above 5%. You can see our complete list of high dividend stocks here.
In addition, Vector Group has paid a stock dividend of 5% each year going back to 1999. Including this unique dividend schedule and adding it to Vector's current yield of 8.0% gives the company an actual dividend yield (cash + stock dividends) of 13.0%.
Vector has other characteristics that also stand out. Perhaps most notable is the company's uniquely diversified business model.
Vector operates in two unrelated but complementary business lines: tobacco and real estate. This is beneficial for shareholders because the tobacco industry is an exceptionally stable component of the consumer staples sector, while real estate is much more volatile.
A last observation about Vector Group is the company's remarkable track record of outperforming the S&P 500 Index. You can view this outperformance in the following image.
Source: Vector Group Investor Presentation, slide 17
On March 1st, Vector Group reported financial results for the fourth quarter and full year of fiscal 2017.
This article will analyze the company's financial performance in detail to determine whether it merits investment at current prices.
Vector Group is a holding company that operates in two unrelated but complementary business lines: tobacco and real estate. Each business segment does business through an operating subsidiary with an iconic brand name:
- Tobacco: Liggett Group
- Real Estate: Douglas Elliman
The company's tobacco segment is (by far) its largest when measured by EBITDA:
- Tobacco adjusted EBITDA: $260.4 million of adjusted EBITDA for the twelve months ended September 30th, 2017
- Real estate adjusted EBITDA: $23.9 million for the twelve months ended September 30th, 2017
Additional details about the company's business model can be seen below.
On the tobacco side, Vector operates as the Liggett Group, which was founded in 1873 and is today the fourth-largest United States tobacco company. The company operates a number of recognizable discount brands such as Pyramid, Grand Prix, Eve, and Eagle 20's. The Liggett Group is also involved - through partner agreements - in the production and distribution of the USA, Bradon, and Tourney brands.
Source: Vector Group Investor Presentation, slide 3
Vector Group's tobacco segment has been the driver of its long-term growth. As the image below illustrates, the segment's adjusted EBITDA has grown from $46 million to $269 million between 1998 and 2016.
Vector's real estate segment is called New Valley, which owns 70.59% of Douglas Elliman Realty LLC. Douglas Elliman is a well-known diversified real estate company that seeks to acquire or invest in additional real estate properties and projects.
Over time, New Valley has invested approximately $215 million in a broad portfolio of real estate projects.
Douglas Elliman also has a successful real estate brokerage operation. The firm operates the largest residential real estate brokerage firm in the highly competitive New York metropolitan area and is also the fourth-largest residential brokerage firm in the United States.
You now have a solid fundamental understanding of Vector Group's operations and business model.
The next section of this article will discuss the company's recent financial performance in detail.
Financial Performance Summary
On March 1, Vector Group reported financial results for the three- and twelve-month period ending December 31, 2017.
On the top line, quarterly revenues of $435.7 million increased by 5.5% over the $412.8 million reported in the fourth quarter of 2016. Full-year results were similar. Revenue of $1.81 billion increased by 7.1% over the $1.69 billion reported in 2016's fiscal year.
On the bottom line, Vector's results improved considerably. Operating income of $47.7 million increased by 54.9% over the $30.8 million reported in the fourth quarter of 2016, while net income of $42.7 million (or $0.27 per diluted common share) increased significantly from the $4.6 million (or $0.03 per diluted common share) reported in last year's quarter.
With that said, Vector Group's significant real estate operations incur significant non-cash depreciation charges, which means that Vector's GAAP net income can fluctuate significantly on a quarter-to-quarter basis. We recommend either looking at longer-term results (such as those from an entire fiscal year) or using alternative financial metrics to gain a better sense of the company's performance.
This analysis will do both. First, let's consider Vector's full-year bottom line performance. Net income for the 2017 fiscal year totaled $84.6 million (or $0.59 per diluted common share) which compares favorably to the $71.1 million (or $0.53 per diluted common share) reported in the comparable prior year. All said, this represents 11.3% earnings-per-share growth from 2016 to 2017.
The metric that Vector appears to rely on most heavily in assessing its financial performance is adjusted EBITDA. Interestingly enough, while Vector's fourth-quarter financial performance was strong when measured by conventional financial metrics, its adjusted EBITDA trend tells a different story.
Vector's fourth-quarter adjusted EBITDA of $54.9 million declined by 9.3% from the prior year's period, while full-year adjusted EBITDA of $257.4 million declined by 8.1% from the prior year's period.
The incongruence of Vector's GAAP and non-GAAP financial results can be puzzling to some shareholders. We can gain some insight into how we should actually assess its financial performance by reading management's comments on Vector's earnings call transcript, where the company's Chief Executive Officer Howard Lorber said the following:
As I noted at the start of the call, we are pleased with our recent performance and continue to believe that Vector Group is well positioned to generate long-term value for our shareholders. We have strong cash reserves, have consistently increased our tobacco profit margins and sales volumes in recent years and will continue to benefit from the favorable terms under the MSA, and are pleased with the prospects for our growing real estate business.
We are also proud of the company’s uninterrupted track record of paying a regular quarterly cash dividend since 1995 and an annual 5% stock dividend since 1999. The company once again reaffirms that its cash dividend policy remains the same."
We believe that Vector's quarter was largely business-as-usual. In addition, the company appears to be positioned to deliver satisfactory total returns moving forward, which we outline in the next section of this article.
Valuation & Expected Total Returns
Vector Group's expected total returns will come from the company's underlying business growth, dividend payments, and changes to the company's valuation.
We believe that Vector's long-term per-share growth will approximate the growth of its cash dividend payment. Over the past 10 years, Vector has grown its cash dividend at a compound annual rate of 4.5% per year. We believe similar growth is likely moving forward.
The next component of the company's total returns is its dividend yield of 13.0%, which is split between its 8.0% of cash dividend payments and the company's 5% annual stock dividend.
The last component of Vector's total returns is future changes to its current valuation. Because of the significant non-cash depreciation charges that impact Vector's GAAP earnings per share, the price-to-earnings ratio is not a useful metric for assessing this company's valuation. Instead, we recommend comparing the company's current dividend yield to its long-term average dividend yield.
Vector Group's current dividend yield is 8.0%, its 5-year average dividend yield is 7.5%, and its 10-year average dividend yield is 7.7%.
Accordingly, we believe that the company has a very solid chance of beating the market going forward, thanks to its:
- 4% business growth
- 8.0% dividend yield
- 5% annual stock dividend
- Potential valuation expansion
Vector Group is a very unique investment opportunity.
The company's diversified business model allows it to blend the benefits of having both a very stable business model (tobacco) and a very cyclical - and opportunistic - business model (real estate).
In addition, the company's management team is very shareholder-friendly. Vector Group has a very high dividend yield and also pays a 5% stock dividend each year.
The company's double-digit total return potential makes us recommend that investors, particularly income investors, take a closer look here. Our conservative estimates imply that Vector Group has a strong chance of beating the market over time.
Are you looking for high-yield stocks with even longer histories of dividend increases each year? Consider the Dividend Aristocrats, a group of S&P 500 stocks with 25+ consecutive years of dividend increases. The Dividend Aristocrats have significantly outperformed the S&P 500 Index in the last 10 years. Their outperformance is likely to continue moving forward, as the Dividend Aristocrats have strong brands and durable competitive advantages. Some are priced attractively enough to buy right now. This is why we created our service Undervalued Aristocrats, which provides actionable buy and sell recommendations on some of the most undervalued dividend growth stocks around. Click here to learn more.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.