Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Vector Group (NYSE: VGR ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Vector Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.7%||Fail|
|1-Year Revenue Growth > 12%||3.4%||Fail|
|Margins||Gross Margin > 35%||42.6%||Pass|
|Net Margin > 15%||3.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||NM||NM|
|Current Ratio > 1.3||2.24||Pass|
|Opportunities||Return on Equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||83.61||Fail|
|Dividends||Current Yield > 2%||9.1%||Pass|
|5-Year Dividend Growth > 10%||5.0%||Fail|
|Total Score||3 out of 8|
Source: S&P Capital IQ. NM = not meaningful because of negative shareholder equity. Total score = number of passes.
Since we looked at Vector Group last year, the company has dropped a point. Slowing revenue growth explains the drop, and shares have struggled to break even over the past year as a result.
Vector Group isn't the best-known tobacco maker in the nation, but it's one of the biggest discount players in the industry. Unlike Altria (NYSE: MO ) and Lorillard (NYSE: LO ) , which focus largely on big-name brands Marlboro and Newport, respectively, Vector aims at the low end of the market with its Pyramid, Liggett, and Grand Prix cigarettes.
Like the rest of the industry, Vector has taken a hit from government attempts to reduce smoking. Between the FDA and the Center for Disease Control, regulators are targeting smoking reduction as a potential saver in health-care costs over the long run. As a result of falling cigarette demand, Altria and Reynolds American (NYSE: RAI ) have announced major layoffs in the past year. Even outside the U.S., Philip Morris International (NYSE: PM ) suffered a setback with the recent court decision in Australia to force it to remove brand images from cigarette packs and replace them with graphic warnings. A similar measure in the U.S. didn't pass Constitutional muster, as Lorillard, Reynolds American, and Vector successfully defended a lawsuit blocking the move.
Vector's huge dividend is extremely attractive. But as Fool analyst Austin Smith pointed out earlier this year, Vector has been paying out well in excess of its earnings for a long time, taking on debt and helping to drive its shareholder equity below zero. It's unclear how long the company can sustain $600 million in debt and still pay its big dividend.
For Vector to improve, it needs to get growth moving in the right direction again. Margins aren't likely to improve, though, and the best that most investors can hope for is for the stock to tread water while it makes dividend payments.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
Vector Group may not be perfect, but we have some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Add Vector Group to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.