During recessions, tobacco companies still manage to thrive due to stable consumer demand. 

Vector Group (VGR), after selling its real estate division in 2021, streamlined into a pure-play tobacco business. 

The company’s focus on its core Montego brand, popular in the discount cigarette market, has made it attractive to dividend investors, offering a yield over 5%. 

Despite market concerns, the company’s strong cash flow and stable operations position it well for the future.

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During economic downturns, when many industries struggle, certain sectors, like tobacco, remain remarkably resilient.

The 2008 global recession caused widespread panic in the markets, but major tobacco companies like Altria (MO), British American Tobacco (BATS), and Japan Tobacco International not only weathered the storm but continued to grow.

Japan Tobacco International’s cigarette sales increased by 10.8% in 2008, and Altria’s gross turnover rose by 15.2% over the previous year.

These companies managed to thrive as consumers maintained, and in some cases, increased their smoking habits despite the recession.

This resilience shows tobacco’s status as a recession-proof industry. Even when there is less money to go around, smokers tend to continue purchasing tobacco products, making tobacco companies less sensitive to macroeconomic shifts.

While industries such as real estate or retail may see significant drops in demand, these companies maintain stable cash flows and revenue growth. This stability makes them attractive to investors looking for defensive stocks that can hold their value even during tough economic times.

Until 2021, Vector Group (VGR) was a challenging company to analyze due to its involvement in two distinct industries: tobacco and real estate.

The lack of synergies between these two businesses left investors confused. However, recognizing this issue, the company took decisive action by selling its real estate division, New Valley, and transforming itself into a pure-play tobacco business.

This shift has simplified the business model and enabled the company to focus entirely on its core product; tobacco.

As a result, Vector now boasts a more streamlined and stable operation, better suited to weather macroeconomic fluctuations.

The company’s core tobacco business remains incredibly stable, especially given the predictable nature of consumer demand for its products.

Unlike the real estate business, which was heavily influenced by macroeconomic factors such as interest rates, the tobacco industry tends to be less sensitive to such fluctuations.

Additionally, this stability has made Vector an attractive option for dividend investors, as the company offers a substantial dividend yield of over 5%.

The company’s tobacco operations are anchored by its popular Montego brand, which has become a dominant player in the deep-discount cigarette market.

Montego is now the fourth-largest cigarette brand in the United States, following only industry giants Marlboro, Newport, and Camel.

The brand’s affordability has been a key driver of its success, particularly as price-sensitive consumers continue to flock to discount tobacco products.

Furthermore, the sale of the real estate business had immediate financial benefits. The company’s Uniform return on assets ”ROA” jumped from 40% in 2020 to 77% in 2021.

Its ROA remained elevated in both 2022 and 2023, showing that the shift was not only timely but sustainable. 

Despite these improvements, the market is concerned that the ROA will revert to pre-sale levels when the company was bogged down by its real estate holdings.

Vector’s transformation into a pure tobacco business has strengthened its financial position and clarified its business model. By focusing on its core product, it is better equipped to handle whatever comes next.

The company’s strong cash flow, stable tobacco operations, and attractive dividend yield make it a solid pick in a market where stable stocks are increasingly hard to find.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research