Vector Group Ltd (NYSE:VGR), headquartered in Miami, Florida, is a publicly traded holding company, which deals in products and services ranging from hotels to tobacco. Although producing famous products like Grand Prix cigarettes and operating major golf courses and hotels in the U.S, before making a big move, dividend investors should keep in mind these following aspects pertinent to this company.
First of all, Liggett, the company’s cigarette division shares continue to decline due to a deteriorating cigarette industry as people are moving towards electronic cigarettes. According to the Management Science Associates: the industry domestic shipment has decreased by 4.7% in 2013 and 2.2% in 2012 respectively. As VGR is a discount brand, the company’s shipment levels decreased quite a lot at around 5.3% in the third quarter.
Secondly, due to its discounted factor and high consumer preference, the company faces intense competition. According to Management Science, the market share of the company’s rivals was as small as 33.7% in 2013, which was 34.4% in the previous year. Similar was the case with Liggett whose market share in 2013 was 11.6%, down from 12.1% in 2012. Thirdly, mergers lead to more competition.
If Lorillard decides to shake hands with Reynolds-American (NYSE:RAI), threatening Marlboro’s dominance, then Imperial Tobacco Group (NASDAQOTH:ITYBY) will emerge as the fourth biggest cigarette maker and hence a strong rival of VGR. On the bright side, VGR is free from making payments under the Master Settlement Agreement. Reason being, the company’s share doesn’t exceed 0.28%.
Even Liggetts share hasn’t exceeded the 1.65% mark. This gives the company a cost advantage of $0.62 per pack of cigarettes, which other companies do not get to benefit from. Moreover, in the electronic cigarette market, VGR entered much later with the launch of its new Zoom brand this year. In this field, Lorillard’s blue Cig seems to be the winner with a 29% share. However, the e-cig business has certain demerits as well.
Significant losses are being produced from this market; an example can be of VGR itself. In the third quarter, the company only realized $1.6 million from its electronic cigarette and less than $10 million in 2014 revenues. Furthermore, adjusted EBITDA losses of the company were $2.9 million and $7.1million respectively. Due to such demerits in the e-cigarette market, VGR’s real estate services continue to be the company’s backbone.
Accounting for 36% of total revenues and similarly, in the cigarette market, the company trades at more than 34 times estimated earnings, which is quite high as compared to its rivals. After going through the above aspects, Vector Group has what it takes to provide safety to dividend investors, which they can’t find in other companies. However, the dividend might not be sustainable. The company’s payout ratio is twice as large as its rivals.
Investors therefore need to keep in mind that the tobacco industry is risky and real estate market is prone to suffer economically in another downturn.