Big Dividend, Insider Bets Bode Well for Stock
MIAMI (TheStreet) -- TheStreet recommended Universal Corp. (UVV) - Get Report, a small-cap tobacco purveyor, on Dec. 22, citing exposure to growth markets and a 4.1% dividend yield.
Since then, Universal has gained 15%, beating the 11% gain of the
Russell 2000
. Though the stock is still undervalued, its yield has fallen to 3.5%. While it remains
TheStreet Ratings'
favorite tobacco stock, "hold"-rated
Vector Group
(VGR) - Get Report
offers a solid alternative. It pays a quarterly dividend of 40 cents, translating to a yield of more than 10%.
Miami-based Vector has three subsidiaries, Vector Tobacco, Liggett Group and New Valley. Liggett and Vector sell discount cigarettes under the Eve, Grand Prix, Liggett Select and Pyramid brands. The company also makes private-label cigarettes.
Through New Valley, the company controls 50% of Douglas Elliman Realty, the largest residential real estate brokerage in New York. During the past three years, revenue has increased 8.5% annually, on average, but profit has fallen 17% a year. Shares of Vector Group have declined 1.5% a year since 2007.
Adjusted fourth-quarter profit rose 5.8% to $18 million, or 25 cents a share, as revenue grew to $237 million. The gross margin dropped from 61% to 51% and the operating margin narrowed from 34% to 31%. Vector holds $357 million of debt and is running a shareholders' deficit, repelling risk-averse investors. Still, it holds $261 million of cash, translating to a quick ratio of 1.8. Its payout ratio of 464% is excessively high, indicating that distributions aren't being funded by earnings alone. Debt grew 16% in 2009.
Despite a shareholders' deficit and high payout ratio, Vector Group is an attractive speculative investment. Management has remained steadfast in dividend payments and the 10% yield trumps those of industry peers, including
Lorillard's
(LO)
5.3% yield,
Altria Group's
(MO) - Get Report
6.8% and
Reynolds American's
(RAI)
6.6%. Vector has a small Wall Street following due to its $1.1 billion market value. Firms rating the stock are independent researchers, such as
TheStreet Ratings
.
But savvy investors are buying shares.
Icahn Associates
, founded by activist investor
, owns 18.6% of Vector. Icahn increased his wager by 1.7% in the fourth quarter. Chairman Bennett LeBow increased his holdings by 13% to 12.4%. Phillip Frost, who was just appointed chairman of
Teva Pharmaceutical Industries
(TEVA) - Get Report
, owns 7.3%.
, a quantitative hedge fund started by prize-winning mathematician Jim Simons, increased its investment to 3.5%.
Chief Executive Howard Lorber bought shares in the latest reporting period, bringing his stake to 6%. Insider buying, particularly by high-level executives, suggests managers are optimistic about the company's prospects.
Vector has returned 11% this year, a respectable climb. The stock appears overvalued at a price-to-earnings ratio of 46, a 200% premium to the industry average. But it's 29% cheaper than peers based on sales per share. Considering insider buying, Vector's turnaround story might have a few more chapters. In the meantime, a 10% yield should keep investors entertained.
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-- Reported by Jake Lynch in Boston.