Whether you're pro- or anti-tobacco, the fact is that more than
1-in-7 people in the world today still smoke. And as emerging
economies see their middle classes grow, the use of tobacco in its
many forms escalates. Nearly 2-in-5 men in India smoke, while
3-in-5 Chinese men do.
Taxes on cigarettes continue to rise, and regulatory pressures
are intensifying, but those addicted to the nicotine that tobacco
delivers will find a way to shoulder these burdens.
Tobacco companies typically aren't that exciting, but they
continue to service a market that despite the health concerns isn't
shrinking very fast - and isn't likely to go away anytime soon. And
these company's continue to churn out hefty profits.
Think tobacco, and the companies that come to mind include the
Altria Group (
), Philip Morris International (
), Reynolds American (
Shares of the first three are up more than 20 percent this year
(Lorillard is flat).
What's more, these four companies also pay nice dividends,
yielding between 4 and 6 percent.
During the recession, many companies cut back or eliminated
their dividends, but not the tobacco companies. Their dividends are
historically considered recession-proof.
After digging into the DJ Tobacco Index, I found just what I was
looking for: A small-cap, dividend-paying tobacco stock. It turned
out to be one paying a dividend that was 50 percent better than the
best one being offered by the big companies, with an 11-year track
record to boot.
***The company I found is
Vector Group (
, a Miami-based company whose Liggett Group sells brands including
Eve, Grand Prix, Pyramid and USA. Its Vector unit is working to
develop cigarettes that pose less of a health risk. The holding
company also has real estate operations.
If you're not a smoker, chances are that you don't know of
Liggett's brands - they lack name recognition. But Liggett was the
first major domestic cigarette maker to successfully introduce
discount brands. Liggett, which has no foreign operations, holds
approximately 9.2 percent of the overall discount cigarette market
segment. It's also making the deep-discount Montego brand for
Circle K convenience stores.
Vector Group remained profitable through the recession -
although in 2009 investors saw per-share earnings drop to $0.33
from $0.72 the year before. For the September quarter, earnings
fell to $0.14 per diluted share from $0.21 in the year-ago period,
mostly because of one-time charges. Revenue rose 25 percent to $295
At year-end 2009, Vector Group was holding onto $209 million in
cash, but it recently reported carrying $427 million in debt. Free
cash flow took a hit in 2009 because of $110 million in deferred
Still, over the past five years, revenue has grown an average of
10 percent annually, net income has risen an average of 40 percent,
and earnings per share have averaged 33 percent annual growth.
The stock chart paints a slightly clearer picture. As you can
see in this chart, the stock has traded for less than $20, and most
recently hit a high of $19.80 on September 14
Potential Vector investors might have become unnerved on
when the stock plunged double-digits during the day, and finished
8.6 percent lower. The catalyst was that Vector had announced
completion of the private placement of $90 million of its 11%
senior secured notes due in 2015. That's a high rate in a low-rate
environment, but the company had previously announced those
But Vector has been raising its dividend, from $0.30 quarterly
five years ago, to the current $0.40. So if you're interested in a
dividend-paying vice stock, and want a small-cap tobacco company
that pays a decent dividend, take a look at Vector Group.
Every investor should own dividend-paying stocks, and I've
prepared a special 'high yield' report with two 8 plus percent
yielders. Check out this report
. You'll be invited to receive a risk-free subscription to my
Small Cap Investor PRO
advisory and learn more about the benefits of dividend-paying