Friday, August 26, 2011

Universal Corporation Stock Analysis

Universal Corporation (UVV), together with its subsidiaries, operates as a leaf tobacco merchant and processor worldwide. It engages in selecting, procuring, buying, processing, packing, storing, supplying, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products. Universal is a dividend champion has paid uninterrupted dividends on its common stock since 1927 and increased payments to common shareholders every year for 40 years.

The most recent dividend increase was in November 2010, when the Board of Directors approved a 2.10% increase to 48 cents/share. The largest competitors of Universal include Alliance One International (AOI), British American Tobacco (BTI) and Phillip Morris International (PM).

Over the past decade this dividend growth stock has delivered an annualized total return of 3.90% to its shareholders.

The company has managed to deliver an increase in EPS of 3.50% per year since 2002. Analysts expect Universal to earn $4.25 per share in 2012 and $4.50 per share in 2012. In comparison Universal earned $5.42 /share in 2011. The company has managed to consistently repurchase 0.70% of its common stock outstanding over the past decade through share buybacks.

The company has managed to generate high returns on equity with the exception of a brief dip in 2006 on lower profitability. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 4.20% per year over the past decade, which is slightly higher than the growth in EPS.

A 4% growth in distributions translates into the dividend payment doubling almost every 18 years. If we look at historical data, going as far back as 1974, we see that Universal has actually managed to double its dividend every nine years on average.

Over the past decade the dividend payout ratio has mostly remained unchanged, with the exception of a brief spike in 2006 – 2007 on lower short-term weakness in profitability. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Universal is trading at 6.80 times earnings, yields 5.10% and has a sustainable dividend payout. This value stock currently fits my entry criteria. While I find the dividend to be well covered, future dividend growth will be constrained by the lack of visibility concerning the company’s future earnings prospects.

Full Disclosure: Long UVV

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