Universal Corporation (NYSE:UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors 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. This dividend champion has raised dividends for 39 consecutive years.
Over the past decade, Universal has delivered a total return of 11.60% to shareholders.
At the same time earnings per share have grown by 1.50% on average since 2000. Analysts expect UVV to earn $5.25/share in 2010 and $5.63/share in 2011. This is an increase over the $4.32/share Universal earned in 2009. The slow growth in tobacco consumption worldwide and risk of increased taxation and regulation in the sector represent one of the major risks for the company going forward.
The annual dividend has increased by 4% annually over the past decade. A 4% growth in dividends translates into the distribution doubling every 18 years. The current quarterly dividend of $0.46/share is double what it was in 1993-1994. The latest dividend increase was for 2.20% in November 2009.
The return on equity has generally decreased from a high of 22% in 2000 down to 15.30% in 2009. I generally like to see a stable value of this indicator over time.
The dividend payout ratio has generally remained below 50%, with the exception of 2006 and 2007, which struck as outliers.
Overall Universal Corporation does appear to be attractively valued, trading at a P/E of 9, yielding 3.90% and having an adequately covered dividend. The main problem for the company is the slow earnings growth, and concentration in the tobacco industry, which comes with its own inherent risks. I already have exposure to the tobacco sector through my position of already, Altria (MO) and Philip Morris International (PM). However I would consider initiating a position in UVV on dips whenever I have extra cash on hand.
Full Disclosure: None
Dividend Growth Investor
About the author:
My name is Ben C. and I am 2nd year MBA candidate at the Anderson School of Business at the University of California- Los Angeles. I have a BS in Economics from the Wharton School of Business at the University of Pennsylvania. Before coming to Anderson I worked as a generalist equity research analyst for Right Wall Capital, a long-short equity hedge fund located in New York City. Prior to working at Right Wall I worked as an analyst at Blue Ram Capital, another long-short equity hedge fund located in Rye Brook, NY. This past summer, I worked for West Coast Asset Management as a research analyst. West Coast, which was co-founded by Kinko’s founder Paul Orfalea, is run by well-known value investors Lance Helfert and Atticus Lowe.