Replies to post #18600 on Castle Brands Board (ROX)

[FUNMAN]

Vector Group: A Diversity Strategy That Will Work

To read with all of the charts and graphs, click here.

https://seekingalpha.com/article/4127485-vector-group-diversity-strategy-will-work


Nov. 24, 2017 12:27 PM ET
By Tim Gruppi

Summary

Vector Group has a forward dividend yield of 7.30%, and just beat revenue by 36.63M.

The company is well managed with executive management and directors owning 13% of the company.

This company is a unique hybrid, with strong revenues from both real estate and tobacco, which offers investors the diversity of two unique business sectors.

Vector Group (VGR) is a dynamic company that successfully invested profits from selling discount cigarettes into high-end real estate. The historical return of this hybrid company is outstanding, and it should be sustainable for at least a few more years. This stock should give investors strong total capital gains when dividends are included for a mid-term investment. I will outline the most positive areas of the business, then describe some challenges and area of uncertainty.

History and business

Vector’s roots go back to 1822 when John E. Liggett’s grandfather opened a snuff shop in Belleville, Illinois. Liggett went on to create a partnership with George S. Myers, and by the 1880s, the Liggett & Myers Tobacco Co. had formed a successful cigarette business with brands such as Chesterfield, Eve, L&M and Lark.

In 1980 the company was acquired by Grand Metropolitan PLC, then was bought by Bennett S. LeBow who took it public with a listing on the New York Stock Exchange. In 1993 they relocated headquarters to Miami from New York and renamed to the Vector Group in 2000.

Vector started 2000 with 99 percent of revenue coming from tobacco. As of 2016 only 58% comes from cigarettes. In 2000 Vector started investing tobacco profits into real estate.

To read an interesting Miami Herald piece about Vector Group and their history click here.

Key fundamentals

An impressive 7.26% dividend would be the first thing that catches most investor attention. This comes with a payout ratio of 280.52%. One result of this high dividend is a low beta of .38.



Chart provided by Morningstar

Although the fundamentals appear unimpressive, it is not easy to get a clear vision on this company because they are a hybrid involved in two unrelated businesses which makes it hard to dig into the accounting and determine accurate book value. The large dividend and extremely high payout ratio are more factors that make this a hard company to analyze based on fundamentals.

This chart shows how much revenue and EBITDA Vector Group brings in by sector. It is a promising signal that the real estate revenue keeps growing.



Sourced from Vector Group Website

The total return for this company is remarkable. $100 invested in December 2005 would be worth $512.60 as of February 2017. This beat the S&P, which netted $252.90 within that same time frame.



Sourced from Vector Group Website

How safe is the dividend?

The biggest factor that concerns an investor researching Vector Group (VGR) is how much longer they will be able to sustain this streak of phenomenal shareholder returns and dividend payouts. I ran a lengthy review of Vector Group leadership because the key reason I'm invested in this company is because insiders hold large amounts of company stock.

When researching companies to invest I always keep in mind the Warren Buffett quote, "I am looking for an honest and able management to run (the company) because I don't know how to run it myself," says Buffett.


Leadership for a new millennium

Vector Group leadership has proven businessmen with long track records of providing value to their investors, while creating a unique business that I believe is currently undervalued. The story begins with Bennett LeBow who is responsible for the current makeup of the Vector Group. He negotiated favorable terms with the government in the master tobacco settlement, which gave the Vector Group a cost advantage of roughly 66 cents per pack over cigarettes of their competitors. Under LeBow's leadership the company started investing tobacco revenues into real estate. LeBow currently owns 1,719,102 shares with a market value of $37,252,940.

LeBow is now Chairman of the Board of Directors, while Howard Lorber is the current CEO. Lorber came from the real estate side. By the time he got his 2006 promotion to CEO Lorber had been president of the Vector’s New Valley real estate subsidiary for 21 years. Lorber owns .40% of the company - 540,073 shares at a value of $11,703,381.

Introducing Dr. Frost, who has been dubbed the Warren Buffett of biotech, and specializes in healthcare investments. He is drawn to the value of the Vector Group and is currently the largest single shareholder, owning 11.4% of the company and 14.8 million shares. Frost also owns a 35% share in Castle Brands (ROX), maker of premium liquor -of which Vector has an 8% stake, and 36.5% share of Ladenburg Thalmann (LTS), a firm with 4,000 financial advisors of which Vector Group owns 8.23%.

Business risks

Could this be another Enron?

Debt is a big concern for potential investors in the Vector Group. Compared to tobacco peers Vector seems extremely highly leveraged, even compared with a quality REIT such as Realty Income (O). This is something that I will watch closely, but I'm OK with the debt due to the quantity of liquid assets this company holds. Vector Group's credit rating is a solid B2 from Moody’s and B from Standard & Poor’s. During the most recent earning call held on November 7, 2017, Howard Lorber stated, “this company has cash and cash equivalents of approximately $397 million, including approximately $101 million of cash at Douglas Elliman and $88 million cash at Liggett.”

The FDA risks

Ronald Bernstein, the CEO of Liggett Brands, had these thoughts when asked about the FDA directive of reducing the amount of nicotine in cigarettes, and made this statement on the recent earnings call held on August 4th, 2017:

"So from our perspective, we believe that this is going to be a long process, we are not even clear what it is they are exactly trying to do and we are always going to be in a position to comply with regulations and also as was the case when the FDA went beyond constitutional guidelines with the graphic winning labels we will challenge them in court and I’m sure the rest of the industry will as well if they come up with something that violates our rights. So I mean in the short-term into immediate-term I don’t really see much of an impact at all."

One area of concern for myself is the Vector Group has not announced any plans to create any innovative products that would help offset any FDA ruling on reducing the nicotine in cigarettes. Altria (MO), which is the biggest Tobacco company in America, has announced a partnership with Philip Morris to distribute the IQOS. This is one reason I recommend researching Altria as a stock purchase along with Vector Group.

Tax code implications

When asked about the most recent tax reform bill that was just passed by the U.S. House of Representatives, Ronald Bernstein, president and CEO of Liggett Brands, made this statement on the earnings call on November 07, 2017.


“I guess, the space obviously that hurt the most on the high tax base to begin with, which is basically New York, Florida, New Jersey, I guess. So, it's hard to say because we don't know the final form at this particular point.”

This could be an area of concern for Vector Group shareholders if this bill is passed, because so much of the Vector Group Real estate division is dependent on these Real Estate Markets.

A solid buy but watch the debt

In conclusion I rate Vector Group as a buy. Although, as an existing shareholder of Vector Group I will be paying close attention to their debt and ability to pay it down. If the company gets low on liquidity, that would not be a good sign, and I may think of selling some of my position at that point. Until then I will buy this stock along with Altria, which will offer a hedge in case the FDA decides to mandate nicotine reduction. Altria (MO) would be able to pick up market share from Vector Group n the tobacco segment due to their partnership with Philip Morris (PM) in IQOS technology within the United States.

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