Dividend Kings In Focus: Universal Corporation

Updated on September 13th, 2023 by Nate Parsh

While there are many dividend-paying stocks in the market, there are only 50 stocks that have offered a rising dividend for at least 50 consecutive years. This exclusive group of stocks are referred to as the Dividend Kings.

You can see the full downloadable spreadsheet of all 50 Dividend Kings (along with important financial metrics such as dividend yields, payout ratios, and price-to-earnings ratios) by clicking on the link below:

Earlier this year, Universal Corporation (UVV) raised its dividend for the 53rd year in a row. This article will review the company to determine if the stock earns a buy recommendation today.

Business Overview

Universal Corporation is the largest exporter and importer of tobacco leaves in the world. The company is a wholesale purchaser and processor of tobacco and operates as a go-between for farms and the companies that manufacture cigarettes, pipe tobacco, and cigars. Universal Corporation has been in business since 1886 and is headquartered in Richmond, Virgina.

Universal Corporation has an extensive reach around the world.

Source: Investor Presentation 

Universal Corporation has a presence in more than 30 countries and employs in excess of 20,000 permanent and seasonal employees.

Universal Corporation has had a difficult couple of years as earnings-per-share actually declined from 2010 to 2023. There have been years of sporadic growth, but overall EPS has declined in that 13-year period.

Still, there are some bright spots to the company’s business that could lead to future returns, not to mention a very appealing dividend yield which currently stands at nearly 7%.

Growth Prospects

As the largest exporter and importer of leaf tobacco in the world, Universal Corporation offers a size and scale that competitors cannot match.

This means that the company can count the largest tobacco product manufacturers in the world among its customers.

Source: Investor Presentation

Six of Universal Corporation’s top customers are among the largest tobacco manufacturers in the world. These companies control more than four-fifths of the global tobacco market.

More than 60% of Universal Corporation’s annual revenue usually comes from these customers. Counting the largest names in the sector as customers likely means that the vast majority of revenues can be relied upon. This provides the company some stability and can reassure shareholders that the business can be sustainable.

Universal Corporation also strives to source most of its sales to meet anticipated demand. This means that the company targets its inventory to customers with committed sales orders. This allows Universal Corporation to not be stuck holding products or being forced to sell at a lower price in order to reduce inventory.

Finally, as smoking rates decline in the U.S. and elsewhere, companies in the tobacco sector must figure out other ways to grow revenue.

Source: Investor Presentation 

Universal Corporation is attempting to do just that. The company made its first such acquisition earlier in 2020 when it added FruitSmart Inc. to its portfolio. FruitSmart processes fruit and vegetable ingredients and markets them to customers around the world.

Next, Universal acquired Silva International, a privately-held dehydrated vegetable, fruit, and herb processing company. Silva procures more than 60 types of dehydrated vegetables, fruits, and herbs from over 20 countries around the world.

The company continues to make bolt-on acquisitions, such as the purchase of Shank’s Extracts, a privately-held specialty ingredient, flavoring, and food company with a portfolio of over 2,400 extracts, distillates, natural flavors, and colors.

Diversifying the business is a very prudent move, in our opinion, as the number of smokers declines with each passing year.

Competitive Advantages & Recession Performance

Universal Corporation’s chief business tends to see a reliable consumer, even if tobacco usage has declined. Consumers who do smoke are likely to seek out tobacco products regardless of the state of the economy. This makes business reliable even in an unreliable time.

While earnings growth has been weak in recent years, Universal Corporation navigated the last recession very well. The company’s earnings-per-share before, during, and after the Great Recession are listed below:

• 2006 adjusted earnings-per-share: $3.48
• 2007 adjusted earnings-per-share: $4.02 (15.5% increase)
• 2008 adjusted earnings-per-share: $4.32 (7.5% increase)
• 2009 adjusted earnings-per-share: $5.68 (31.5% increase)
• 2010 adjusted earnings-per-share: $5.30 (6.7% decrease)
• 2011 adjusted earnings-per-share: $3.25 (38.7% decrease)
• 2012 adjusted earnings-per-share: $4.66 (43.4% increase)

Universal Corporation’s earnings-per-share improved more than 41% from 2007 through 2009 during what was a very difficult environment for many companies in the market.

Earnings-per-share did not start to suffer their steep decline until after the worst part of the recession had taken place. It should be noted that the company still has not taken out its 2009 high for annual earnings-per-share.

Generally, we believe that the relatively resilient demand for tobacco leaves will keep producing relatively robust results for the company even during challenging economic periods. This was demonstrated again both during the COVID-19 pandemic in 2020 and the current tough macroeconomic landscape.

Valuation & Expected Returns

Like all stocks, Universal Corporation’s total returns will consist of dividend payments, earnings growth, and valuation changes. Using the annualized dividend of $3.20, shares of Universal Corporation yield 6.8%.

The dividend payout ratio has climbed steadily in recent years. The payout ratio was 84% in fiscal 2023, but the projected payout ratio for this fiscal year is a slightly more reasonable 70%. We don’t believe a dividend cut is imminent, but do advise caution with regards to the dividend. At the very least, it is likely dividend growth will be weak until earnings growth accelerates.

Due to the company’s rather weak performance for profitability over the last 10 years, we anticipate modest earnings growth of just 1.5% annually over the next five years. Still, this will positively contribute to shareholder returns.

Finally, expansion of the valuation multiple is not unlikely in our view. With expected earnings-per-share of $4.60 for fiscal year 2024, shares are trading with a price-to-earnings ratio of 10.2. With our target valuation of 12 times earnings, multiple expansion could add 3.3% annually to returns over the next five years.

Therefore, expected total returns would consist of the following:

• 1.5% earnings growth
• 6.8% dividend yield
• 3.3% multiple expansion

In total, we expect annual returns of 10.1% over the next five years. This is enough of a projection to warrant a buy rating for Universal Corporation. We note that the stock has a certain level of appeal for income investors due to the very high yield, even if dividend growth is likely to remain muted.

Final Thoughts

Universal Corporation is one of the more recent additions to the Dividend Kings. There are only 50 companies that have the required 50+ years of dividend growth to gain membership into this exclusive group.

Universal is also a high dividend stock, with a yield approaching 7%.

While Universal Corporation offers a high yield, it also has had difficulty growing earnings in more than a decade, which in turn has caused the dividend growth rate to slow considerably as well.

The company’s dividend growth has not been accompanied by earnings growth, which has resulted in a higher dividend payout ratio. The good news is that the expected payout ratio for the current fiscal year should be lower than previous years.

In addition, total return potential earns Universal Corporation a buy rating from Sure Dividend.

The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors: