Summary
VGR recently spun off its real estate side of the company.
Multiple Pros/Cons of investing in the company.
My valuation and thoughts on its future returns.
Dusan Ilic/E+ via Getty Images Vector Group Ltd. ( VGR ) by all accounts is a value opportunity that has recently taken a significant downturn in price. Digging into it further though, you will find some specific issues that make this stock a hold at its current price, but a good add to the watchlist for potential purchase if it continues its downslide. Company Description
Vector Group Ltd. is a diversified holding company headquartered in Miami, Florida, with an executive office in Manhattan and tobacco operations in North Carolina. Through our subsidiaries, Liggett Group LLC and Vector Tobacco Inc., we manufacture and market high quality cigarette products to adult smokers in the United States. Vector Group also owns New Valley LLC , which holds minority investments in various real estate projects throughout the United States. – Taken from Vector Group’s website
Only real thing I would like to add to the company description is about the type of cigarettes that VGR produces. The company mainly produces discount cigarettes and are currently the 4th largest manufacturer, in terms of volume, in the United States. Moat
For those unfamiliar with moat, it is the ability to for a company to maintain their competitive advantage and fend off competition. This is just like the protection of the medieval moats that were found around castles. I primarily like the description and categories of moat found here by Phil Town of Rule 1 Investing. I won’t go into each one here, so I encourage you to read about them if you are unfamiliar. So what moat does VGR have?
Primarily the PRICE moat holds them in significant advantage when compared to larger companies such as Altria ( MO ) and Philip Morris ( PM ). The ability for VGR to sell cigarettes at a discount due to the Master Settlement Agreement or MSA is a definite source of advantage. (More info on MSA can be found here .) Basically, it gives VGR a $0.80 per pack advantage over the larger companies.
I would also argue that VGR also has a BRAND moat, albeit not one as strong as Philip Morris has in a brand like Marlboro. That being said, brands are brands and people like what they like. A European study from 2019 ( here ) found that ~87% of people have a “usual brand” and 44% reported being loyal “a lot” to their brand of choice. Another interesting fact, going back to the PRICE moat, is that ~52% of people noted price as a leading factor of selection, only behind taste. PROS/CONS of Investing in VGR
Let’s break down, in brief and simplistic terms, the good and the bad that I currently see in VGR. Pros:
The new spinoff has brought VGR into a space where they can concentrate on tobacco only. The history of spinoffs is very large, and very mixed when it comes to success and failure in the investment space. What I do like for this spinoff is the significant different nature that was between the two portions of the company. This wasn’t tech from tech or even food from tobacco, but instead real estate and tobacco trying to live harmoniously together. This simply makes it easier for myself to evaluate the company, and for me, that is also a pro.
VGR is gaining market share slowly and consistently. In terms of US market share, VGR has shown the ability over the 15 years to continue to show slow steady growth to capture more and more smokers. As of year-end 2020, it held almost 30% of the discount cigarette industry. VGR Investor Relations The dividend is sitting at around a 7% yield on cost at the time of writing. Something I always enjoy is a nice dividend to protect the downside of my investment. After paying a $1.60 dividend to 2019, the dividend was cut in half to $0.80 per share. This was a smart move in my opinion and one that moved the dividend towards safety. Cons:
Before we begin, I would like you to take a look at this article by Deep Value Ideas ( here ) as I think it is important to hear differing opinions and the cons are in detail there.
The debt. Simply said, after the spinoff, it is looking like VGR will have about $1.4 billion in long-term […]
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