Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Big Tobacco making money at Vector Group (NYSE: VGR)?

The search for value investments often takes some strange turns. For example, many value investors deliberately search for stocks that are unpopular, obscure, and morally offensive.

Under those circumstances, Vector Group (NYSE: VGR) could be the perfect value investment. To elaborate, Vector Group Ltd manufactures cigarettes and e-cigarettes, possibly the two of the most politically incorrect products in America.

However, Vector Group’s stock is cheap, and it pays an impressive dividend. For example, reports Vector Group offered a dividend yield of 15.41%, an annualized payout of $1.60, and a payout ratio of 390.2% on 5 January 2018.

Therefore, Vector Group offers an impressive dividend for a stock that traded at $10.87 a share on 8 January 2018. For instance, Vector shareholders have received a 40¢ dividend every quarter since June 2013, NASDAQ reports.

Is Vector Group (NYSE: VGR) Making Money?

Thus, Vector Group (NYSE: VGR) is a great dividend stock but is it making money?

The answer to that question; is yes Vector Group is making money, but it is not keeping that money. For example, Vector Group records a $153.57 million gross profit on revenues of $513.87 million for 3rd Quarter 2018. However, Vector Group recorded a net income of $12 million and an operating income of $66.02 million for the same quarter.

Interestingly, Vector Group generates a respectable cash flow, but it does not keep the cash. For example, Vector Group recorded an operating cash flow of $87.38 million, an investing cash flow of $13.34 million, and a free cash flow of $87.97 million for 3rd quarter 2018.

However, Vector Group reported cash and equivalents of $363.77 million and short-term investments of $135.25 million on 30 September 2018. Therefore, Vector Group (NYSE: VGR) had $498.97 million in cash at the end of 3rd Quarter.

Moreover, Vector Group recorded Total Assets of $1.347 billion and current assets of $661.67 million on the same day. Thus, Vector Group has little cash and very limited assets.

Is Vector Group (NYSE: VGR) a Garbage stock or a value investment?

Hence, Vector Group looks like a classic garbage stock management is trying to pump up with high dividends. To explain, Vector Group is such a questionable stock the only management can get investors to buy it is with a high dividend.

To make matters worse, instead of changing the business model, Vector Group management pays a big dividend. My guess is that Vector Group management hopes income and institutional investors will buy their stock without asking what it is.

Notably, selling products that cause cancer and ultimately kill off the customers is not a wise business model. However, that is the business at Vector Group (NYSE: VGR).

Not surprisingly, Mr. Market sees little value at Vector Group no matter how big the dividend is. However, there are enough investors out there who refuse to ask questions to buy VGR stock.

A Value Case for and against Vector Group (NYSE: VGR)

The value case for Vector Group (NYSE: VGR) is simple. It goes something like this; people are always going to smoke and somebody will make money selling them cigarettes.

Moreover, there is still a large market for cigarettes out there somebody is profiting from. For example, the Centers for Disease Control and Prevention (CDC) estimates 15.5% of American adults or around 38 million American adults smoke.

In fact, even the poorest smokers will fork over $6.84 for a pack of cigarettes. Tellingly, Statista estimated the cost of a pack of cigarettes in the USA at €6 ($6.84) in August 2018.

On the other hand, cigarettes are a morally indefensible product because they kill people. In addition, e-cigarettes (Vape) which Vector sells through its Zoom E-Cigs LLC are even more questionable. In particular, E-cigs look like a scam to get teens hooked on tobacco.

For example, the number of teens who use e-cigarettes increased by 75% in 2018, The Wall Street Journal claims. Under those circumstances, efforts to ban vaping and e-cigarettes are probably inevitable.

Hence, any money Vector could lose the money it is investing in e-cigs. Additionally, Vector could face a huge legal bill for defending e-cigarettes.

Vector Group’s (NYSE: VGR) Market is disappearing

Finally, even with e-cigarettes, the percentage of smokers is declining dramatically.

For instance, the CDC estimates the percentage of smokers in the USA fell from 20.9% in 2005 to 15.5% in 2016. Thus, Vector Group (NYSE: VGR) lost 5.4% of its market in just six years.

Moreover, Vector Group faces a serious demographic crisis. To elaborate, the older people more likely to find smoking socially acceptable or tolerable are dying off.

Specifically, the US Census Bureau predicts a historic increase in deaths, from 2.6 million in 2015 to 3.6 million in 2036. Deaths will increase because the massive Baby Boom generation (those born 1945 and 1965) is entering old. Meanwhile, cigarette-hating Millennials (those born between 1980 and 1998) are America’s largest generation.

Vector Group has no future (NYSE: VGR)

This will put a squeeze on Vector Group (NYSE: VGR) because there will be fewer smokers and more pressure than ever on smokers to quit. In other words, America is becoming a hostile place to smokers and tobacco.

Specifically, the only way Vector Group can attract customers is to lie about its products. To explain, Vector Group has to disguise cigarettes as e-cigarettes to get people under 20 to try them.

Logically, if e-cigarettes get banned; or become as socially unacceptable as smokes, Vector Group has no marketing plan. Thus Vector Group has no future without e-cigarettes.

Investors should stay Away from Vector Group (NYSE: VGR)

The smart thing to do under those circumstances is to find a new socially acceptable product to sell. Candy or potato chips for example. However, Vector Group seems so invested in tobacco, it would rather make itself more socially unacceptable.

My advice is for investors to stay away from Vector Group (NYSE: VGR) even though it pays a good dividend. I think this company and its dividends have no real future.

Instead, if you must invest in tobacco buy Berkshire Hathaway (NYSE: BRK.H). To clarify, Warren Buffett’s company does not manufacture cigarettes, but it owns a large in-direct distributor of tobacco products the McLane Company.

In detail, McLane distributes a wide variety of products including cigarettes, candy, gum, snacks, and groceries, to convenience stores and other retailers. Thus McLane makes money off tobacco without basing its business around cigarettes.

Why you should be leery of high dividends

Finally, Vector Group Limited should teach investors to be leery of high dividends. To explain, companies often use big dividends to pump up the value of garbage stocks like VGR.

Consequently, smart investors will always look beyond the dividend by examining the business itself and the financial numbers. Hence, a big dividend at a questionable company should always be a warning sign to investors.

Generally, if the dividend is high and the stock price is low, something is probably wrong at the company. Vector Group (NYSE: VGR) is a classic example of a lousy company trying to hide behind a big dividend.