#BlazeIt (Not Quite) – UVV

[Also see this post at SeekingAlpha here]

Pretty much every dividend growth investor I know owns stock in a tobacco company, myself included. What’s not to like? They make a cheap product and sell it at a ridiculous markup. Their product is very addictive, thereby insuring repeat business. They pay out a huge chunk of their earnings as dividends, ensuring high current income. But what about looking about tobacco from a different angle? Instead of looking at the cigarette producers, what if we look at the suppliers that make their product possible? Conveniently enough, one is a Dividend Aristocrat, making our life that much easier. Today, we’ll be looking at Universal Corporation (UVV).

Quick Background:

From Scottrade:

Universal Corporation (Universal) is a global leaf tobacco supplier. The Company’s business involves procuring and processing flue-cured and burley leaf tobacco for manufacturers of consumer tobacco products. The Company operates in over 30 countries on five continents. The Company’s reportable segments for its flue-cured and burley tobacco operations are North America and Other Regions. It also has a third reportable segment, Other Tobacco Operations, which comprises its dark tobacco business, its oriental tobacco joint venture, and certain tobacco-related services. The Company’s business is procuring, financing, processing, packing, storing, and shipping leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products worldwide. It contracts, purchases, processes, and sells flue-cured and burley tobaccos, as well as dark air-cured and oriental tobaccos.

UVV was incorporated in 1918, after the planned breakup of James B. Duke’s American Tobacco Company. Currently, the company is headquartered in Richmond, Virginia, and employs people. UVV’s only true publicly-traded competitor is Alliance One International (AOI). However, as UVV is in the tobacco industry, companies like Altria (MO, and UVV’s largest customer), Phillip Morris (PM), and Reynolds American (RAI) are also included in the peer group.

For more basic information, check out the company’s website and the 2014 annual report.

Fun fact: An investment of $10,000 in March 1995 would be worth $37,851.38 today, all dividends reinvested. This yields a annual rate of return of 6.9%, underpeforming the S&P during the same time frame. (Source: FAST Graphs)

Investment Criteria:

So we know understand who UVV is. Let’s run our screening criteria on it to see if it’s a good investment.

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (44 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: No (6.4)
• Has am EPS payout ratio of less than 70%: Yes (65.62%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; February, May, August, November)

• Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A-)
• Has generally increasing earnings over the past 10+ years: No
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): No
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes

Other Bonus Ratings:

• Thompson Reuters StockReport: 7 (optimized score of 6)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria

Financial Overview:

UVV’s dividend yield is a very healthy 4.33%. The company pays out $0.52 quarterly for a total annual payout of $2.08. I am not really thrilled with the dividend growth rate; the dividend has been increasing by $0.01 quarterly since 2005, well under historical inflation rates. The payout ratio is still healthy enough at 65.62%, and the total debt/equity ratio is 0.42, which implies that the dividend is not under any major threat. The company is a net purchaser of stock, with total shares outstanding going from 24.33 million in 2010 to 22.62 million currently. The company has not split since 1992.

UVV’s current P/E ratio is 15.16. Morningstar pegs the forward P/E ratio at 8.5.  Given the downward trend in earnings that we’ve seen since 2009, I feel that the change implies a decrease in price more than an increase in earnings.

UVV’s gross, operating, and net profit margins are all much worse than the overall peer group’s: 17.92% vs 77.81%, 6.74% vs 32.60%, and 4.64% vs 24.26% respectively. However, as we noted above, this isn’t really a fair comparison, as companies like PM and MO produce cigarettes for end users; they don’t supply tobacco leaf exclusively. A more fair comparison would be with AOI. There, UVV really shines: 17.92% vs 11.32%, 6.74% vs 5.05%, and 4.64% vs -1.93% respectively.

The return on assets percentage and total debt/equity ratios are also in UVV’s favor when compared to AOI: 4.37% vs -1.87% and 0.4 vs 5.7. The only place where AOI beats UVV is in five-year sales growth, with -0.10% for UVV and 0.84% for AOI.

Risk Factors:

The risks we encounter with UVV are similar to those we see in other tobacco companies like MO and PM. Government regulation and taxation is always around, especially for companies in this industry. Public perception is also currently against tobacco, with the negative health affects of smoking tobacco widely acknowledged and accepted at this point. Variations in tobacco crop pricing could hurt, should prices skyrocket or collapse, compressing margins either way.

Final conclusion:

UVV does not meet my criteria for purchase at this time. It fails the Chowder rule and earnings growth criteria, which quite possibly are the two most important criteria I use. I am also concerned at the consistent earnings downtrend since 2009. The dividend does appear to be pretty well-covered, and the high income is a plus. And in fairness, UVV appears to be a better company than AOI, and is not a terrible investment overall. UVV may be fine for some investors, especially those who need high current income, but it is not what I’m looking for right now. I have many years to go before retirement, so I have time for lower-yielding, faster-growing dividend stocks. I may reconsider UVV if earnings trend positive for a few years, or if I really need one more high-income-producing stock. But right now, I will pass on UVV.

What do you think? Does UVV make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: Long PM

All data is accurate as of market close, 03/09/2015. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.

Tags: dividend-stock-analysis, Universal Corp, UVV