Tobacco Companies Take a Hit, VGR Yields Over 9%

Recently, New York's Southern District certified a class action against tobacco companies, or "Big Tobacco", as if there is a "Small Tobacco" selling loose stogies on the side of the road. Several companies are named in the suit, including the biggest in the space, MO, with its nice steady moderate 4% yield. However, another of the companies named and hammered in trading after the fact is The Vector Group, a small tobacco company with a market cap of t just under 1 billion in an industry that averages 6 billion. But VGR is yielding something that appears TGTBT, a dividend of more than 9.20% per year.

Vector Group (A/K/A "Brooke Group"), is symbol: VGR is a holding company with a few irons in the fire, including the packaging and sale of several off brand, discount smokes in a strong distribution chain that includes candy stores and military bases. There brands are listed as follows: "LIGGETT SELECT, EVE, JADE, PYRAMID, USA, and various private label brands." VGR also owns 50% of the Douglas Elliman real estate brokerage in New York city, as well as a Sheraton Hotel in Hawaii.

The chart for VGR shows that it's bouncing off it's bottom Bollinger Band after getting hit with the rest of the companies named in the law suit for marketing "Light" cigarettes as more safe to smoke than regular brands. From 2003 it is down from 40, and from 2004, it is up from 10 dollars per share.

VGRs p/e is more than 25, which is not exactly cheap, with its industry average trading at 16; but who among us is paying shareholders 9% to wait?

VGR has options, but they are thin on the call side, but a heavy open interest in 14.50 level Feb 07 puts, for those included to buy a little downside protection, just in case people stop smoking on in 130 countries, and the south pole.

Holders of VGR include Carl Icahn (who bought 11 million shares this past July), along with Schwab, Vangard, and several other heavy weights, which is to say, buyers would not be going it alone.

VGR's trailing 12 month gross margin is higher than its industry peers, and so is it revenue per employee, and return on assets, all good things.

VGR's trailing twelve month profit margins are better than its average 5 year profit margins, which is also a good thing. It's peers are generally in as good or better position, but without as dramatic improvement as VGR.

But then again, VGR is also more leveraged than its peers, with a string of press releases that show a willingness to sell off its attractive cashflow in the form of seconday offerings, and funky senior note, and convertable bond deals, and more shares outstanding than ever. See the MSN newsfeed here.

Now, we are not Booya Boy, but this would typically indicate that something stinks, and it's not necessarily smoke.

So, I get a call, and a guy says, "VGR"? What do I say-- "no thanks, I'm trying to quit?" Hell no: I say a company that sells tobacco in a very nervous world, and forwards 9% to shareholders each year may be worth its weight in smoke. But I also say, speaking of profits going up in smoke, a smart sap would make sure he mind his stop limits and price out and consider picking up those puts options on an up day if you'd like a little downside protection.