Vector Group Investment Strategy: Total Return

By The Wall Street Fox Monday, December 14, 2015
 

Vector Group (VGR) is an anomaly. The company combined two of the strongest growing asset classes of all time to create an income producing machine: Real Estate & Tobacco. With a current cash dividend yield of 6.91%, an annual stock dividend yield of 5%, and an annualized return of 20.13% since 2005, Vector Group has been on a tear, but with an impending rising rate environment, is it time to sell this high yielder?
 
Vector Group is the fourth largest U.S. tobacco producer, and dominates in the discount cigarette category thanks to its annual cost advantage of approximately $160M because of favorable treatment under the Master Settlement Agreement. The company also owns 70.6% of Douglas Elliman, the largest NYC real estate broker, and the fourth largest real estate broker in the U.S.

At first glance, the stock looks overvalued, trading at a forward P/E ratio of 29.66. However, this figure is deceptive because P/E doesn't account for unconsolidated assets, and Vector Group owns a portfolio of unconsolidated assets; international and domestic real estate investments, and joint ventures.

Vector Group's Enterprise Value/EBITDA ratio helps illustrate the remaining upside in the stock on a fundamental basis and accounts for the unconsolidated assets that P/E neglects. Trading at FY EV/EBITDA of 12.89x, Vector Group is still lagging its peers, considering the tobacco sector trades at 15.22x EV/EBITDA. Given the same multiple, Vector Group would be trading at ~$28.

Short term technicals: VGR broke below its 3 month trend line but remains in a rising channel, with support near $22. Resistance levels include the broken three month trend line near $24, and rising channel resistance at $25. VGR is up 14% YTD.


Long term technicals: VGR remains in a broad rising channel dating back to its 2009 lows. The stock is currently trading near support levels. Rising channel resistance is ~$27-$28. If the VGR closes below $22, expect the stock to test support near its 2009 trend line at $19-$20.

 
Given that the tobacco and real estate sectors do not fare well in raising interest rate environments, Vector Group is bound to see continued selling pressure. One caveat with this stock is that while total yield is 11.91%, it will only screen the cash dividend yield, currently 6.91%, which may help ease some selling pressure associated with high yield stocks during periods of rising interest rates.
 
Vector Group is a long term position in my Roth IRA. Given the cash and stock dividend, high annualized returns, and the historical performance of the tobacco and real estate sectors, I treat VGR as a total return strategy. Set up DRIP for VGR and let compound interest work for you. Lastly, being from NYC area, VGR's NYC real estate portfolio is just another added bonus to owning this stock. 
The Wall Street Fox

The Wall Street Fox utilizes fundamental and technical analysis to generate investment ideas. TWSF holds a MBA, and is currently preparing for the Chartered Market Technician (CMT) designation.

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