Vector Group: Dividend Dynamo or Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Vector Group (NYSE: VGR  ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Vector Group yields 8.4% -- a pretty high yield but not particularly cause for concern.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford.

Vector Group payout ratio is a very high 193% of net income.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Let's examine how Vector stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage Ratio

Vector Group

N/M

        1

Philip Morris International (NYSE: PM  )

306%

       12

Altria Group (NYSE: MO  )

222%

        6

Reynolds American (NYSE: RAI  )

62%

       12

Source: Capital IQ, a division of Standard & Poor's.

Vector Group's debt burden appears higher than even its highly leveraged peers. It also has negative equity.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Over the past five years, Vector's earnings per share have grown 3% annually, while its dividend has grown at 5%.

The Foolish bottom line
While its yield in itself isn't particularly troubling, Vector's leverage and high payout seem like causes for concern for investors.

To stay up-to-speed on the top news and analysis on Vector Group, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Altria Group and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2011, at 2:54 PM, rl21754 wrote:

    i've been hearing for the last ten years how this dividend is at risk yet it pays every quarter. there's plenty of stocks that can't make that claim. with the added distribution into 7 eleven that VGR is now getting i expect to see increasing profits in any case.

Add your comment.

DocumentId: 1508696, ~/Articles/ArticleHandler.aspx, 4/23/2014 8:31:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,514.37 65.12 0.40%
S&P 500 1,879.55 7.66 0.41%
NASD 4,161.46 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/22/2014 4:05 PM
VGR $20.85 Down -0.07 -0.33%
Vector Group Ltd. CAPS Rating: **
MO $38.64 Up +0.22 +0.57%
Altria Group, Inc. CAPS Rating: ****
PM $83.54 Up +0.04 +0.05%
Philip Morris Inte… CAPS Rating: ****
RAI $55.01 Down -0.07 -0.13%
Reynolds American,… CAPS Rating: ****

Advertisement