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Vector Group: The Dividend Sustainability Reassessment

Jun. 14, 2020 5:14 PM ETVector Group Ltd. (VGR) Stock8 Comments
Vasily Zyryanov profile picture
Vasily Zyryanov


  • In Q1, VGR delivered an 8% improvement in total sales, thanks to the robustness of the Tobacco segment.
  • Net cash flow surged and more than excessively covered capex and dividends.
  • After the dividend cut this year, VGR's shareholder rewards sustainability has improved dramatically.
  • Unfortunately, its imperfect balance sheet poses certain risks in the medium term.

The stock of Vector Group Ltd. (NYSE:VGR), a holding company with a portfolio of tobacco and real estate businesses that I brought to the attention of my dear readers in March, is now yielding close to 7%, a level that income-focused investors might find appealing, especially considering that the number of high-yield dividend opportunities in the market had plummeted due to the S&P 500 rally on the hopes of quick economic recuperation and bumper growth ahead.

In the previous article, I gave a lukewarm rating to VGR due to its insufficient dividend coverage in the past. Now, after VGR delivered startling quarterly cash flow bolstered by stockpiling trends in March, I am slightly more confident in its dividend sustainability, but a few risks still exist.

Tailwinds spurred Q1 sales

Vector Group's first quarter was remarkably robust. VGR topped Wall Street's top- and bottom-line expectations posting total revenue of $454.5 million and adjusted earnings per share of $0.27. On the negative side, GAAP EPS fell short of expectations, as the pundits did not foresee that some of VGR’s long-term intangible assets including goodwill would fail the impairment test. However, investors should not shortsightedly focus only on the overall sales performance, as VGR's portfolio is complex and multifaceted. If we delve a bit deeper, we will notice that the 8% revenue growth was bolstered principally by the Tobacco segment (which includes Liggett and Vector Tobacco) that delivered an almost 12% sales improvement. Both core discount brands including EAGLE 20’s, PYRAMID, GRAND PRIX, LIGGETT SELECT, and EVE and non-core brands’ sales were much stronger than in 1Q19. But while Tobacco shone, growth in Real Estate was tepid. Upon deeper inspection, the key sources of division’s revenue (commission and brokerage income) were down significantly vs. 1Q19, mostly because of softness in New York City, where commission and brokerage income of Douglas Elliman Realty fell by almost 24%, primarily because of the coronavirus-related issues. Northeast, Southeast, and West were slightly stronger, and, thanks to them, the overall segmental revenue was 2% higher and added

This article was written by

Vasily Zyryanov profile picture
Vasily Zyryanov is an individual investor and writer.He uses various techniques to find both relatively underpriced equities with strong upside potential and relatively overappreciated companies that have inflated valuation for a reason.In his research, he pays much attention to the energy sector (oil & gas supermajors, mid-cap, and small-cap exploration & production companies, the oilfield services firms), while he also covers a plethora of other industries from mining and chemicals to luxury bellwethers.He firmly believes that apart from simple profit and sales analysis, a meticulous investor must assess Free Cash Flow and Return on Capital to gain deeper insights and avoid sophomoric conclusions.While he favors underappreciated and misunderstood equities, he also acknowledges that some growth stocks do deserve their premium valuation, and its an investor's primary goal to delve deeper and uncover if the market's current opinion is correct or not.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

LONG VGR this is one is a money maker. Buy the dips collect the nice dividend trim/sell when it rips higher if you wish.
Just a thought from left field, is it possible that VGR could be a candidate for M&A action(maybe with BTI). They acquire VGR and spin off the real estate division to help finance the transaction.
What do you think, does it make any sense ?
@constable1,NOPE. Not BTI;they trashed RAI. Merge with an American company.
Retired Fernando profile picture
If it were to merge, definitely better an America company. But in that case Vector would lose the tax advantage for being a small company. Not sure that only the brand value could justify the merge.
agreed with MO. I could be a busy around mid 8s
Why take the risk with Vector when Altria is safer with about the same dividend
Retired Fernando profile picture
@sbalaw201 , that is a good question. For me the answer is clear, today Altria is a safer bet.
The magic of VGR (and the reason I invested in it) was the 5% stock dividend, but it was eliminated last year. I remain long VGR, though, but not adding new money.
Vasily Zyryanov profile picture
That is a relevant question. Altria is clearly a much better pick due to a more versatile portfolio. It is also much more efficient (I have compared its CROTC with VGR's in the previous article). So, I obviously agree with your take.
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