Updated on October 8th, 2021 by Bob Ciura
While there are many dividend paying stocks in the market, there are only 32 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 32 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 51st year in a row. This article will review the company to determine if the stock earns a buy recommendation today.
Universal Corporation is the largest exporter and importer of tobacco leaf 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, VA.
Universal Corporation has 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 2020. There have been years of sporadic growth, but overall EPS has declined in that 10-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.
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 manufactures in the world among its customers.
Source: Investor Presentation
Six of Universal Corporation’s top customers are among the largest tobacco manufactures in the world. These companies control more than four-fifths of the global tobacco market.
Three-quarters 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 counted on each year. This provides the company some stability and can reassure shareholders that the business can be sustainable.
Universal Corporation also strives to source the majority of its sales to meet anticipated demand. This means that the company targets a majority of its inventory to customers with committed sales orders. This allows Universal Corporation to not be stuck holding product or being forced to sell at a lower price in order to reduce inventory.
Finally, as smoking rates have declined in the U.S. and elsewhere, companies in the tobacco sector have to figure out other ways to grow revenues.
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 over 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 recent 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 actually improved more than 41% from 2007 through 2009 during what was a very difficult environment for many companies in the market.
Earnings-per-share didn’t 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.
Valuation & Expected Returns
Like all stocks, Universal Corporation total returns will consist of dividend payments, earnings growth and valuation changes. Using the annualized dividend of $3.12, shares of Universal Corporation yield 6.3%.
The dividend payout ratio has climbed steadily in recent years. The payout ratio exceeded 70% in fiscal 2021. 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 muted 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 likely in our view. With a fiscal 2022 P/E of 10.9 against our fair value P/E multiple of 11, the stock is essentially fairly valued.
Therefore, expected total returns would consist of the following:
- 1.5% earnings growth
- 6.3% dividend yield
- 0.2% P/E multiple expansion
In total, we expect annual returns of 8% over the next five years. This is a decent expected rate of return, but is not high enough to earn a buy recommendation right now. The stock has a certain level of appeal for income investors due to the very high yield, and steady annual dividend increases.
Universal Corporation is one of the newest Dividend Kings. There are only 32 companies that have the required 50+ years of dividend growth to gain membership into the exclusive Dividend Kings.
Universal is also a high dividend stock, with a yield above 6%.
That said, investors shouldn’t purchase shares of a company simply because of the dividend. While Universal Corporation offers a high yield, it also has had difficulty growing earnings in the past 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.
Universal Corporation receives a hold recommendation from Sure Dividend.