Why UVV Stock’s Payout Is Poised to Rise Again
Are there really any stocks that are recession-proof? No. Are there stocks that perform better than others during recessions? Absolutely. Some of the best recession-resistant stocks are “sin stocks,” which are shares of companies that operate in areas that some consider to be unethical, such as alcohol, tobacco, gambling, and arms manufacturing.
One so-called sin stock that has been making money hand over fist for years is Universal Corp (NYSE:UVV).
The company’s name is ambiguous enough that the company could do almost anything, but it’s the world’s leading global supplier of leaf tobacco. It has operations in more than 30 countries on five continents. (Source: “Investor Presentation: Fiscal Year 2023,” Universal Corp, last accessed May 18, 2023.)
Universal Corp stock is a great sin stock for investors who don’t want to get their hands too dirty in the tobacco business.
The Richmond, Virginia-based company doesn’t grow tobacco or manufacture consumer tobacco products. Instead, it’s a go-between for tobacco growers and tobacco-product makers. The company provides agronomy support, research, and financing to tobacco farmers. It also procures, processes, packs, stores, and ships tobacco and burley that’s mainly used to manufacture cigarettes, cigars, cigarillos, pipe tobacco products, and smokeless tobacco products.
Every year, the global tobacco industry produces about 5.3 trillion cigarettes. Of that number, less than five percent are sold in the U.S. This is why you probably won’t be familiar with all of Universal Corp’s customers. Nevertheless, more than two-thirds of its tobacco sales are to companies with major positions in their respective markets and longstanding business relationships with Universal Corp.
Some of its biggest clients are Altria Group Inc (NYSE:MO), British American Tobacco PLC (NYSE:BTI), China Tobacco International, Inc., Japan Tobacco Inc (TYO:2914, OTCMKTS:JAPAF), and Philip Morris International, Inc. (NYSE:PM).
Pivot Toward Food Ingredient Industry
The future of Universal Corp isn’t all about tobacco, which is a good thing, since more and more people are shunning cigarettes, cigars, and pipes.
In early 2020, Universal Corp announced the completion of its acquisition of FruitSmart, Inc., an independent specialty fruit and vegetable ingredient processor. FruitSmart supplies a wide range of juices, concentrates, blends, purees, fibers, seeds, seed powders, and other value-added products to food, beverage, and flavor companies around the world.
In October 2020, Universal Corp acquired Silva International, a specialty dehydrated vegetable, fruit, and herb processing company. In addition to sourcing dehydrated vegetables, fruits, and herbs, Silva International processes natural raw materials into custom-designed ingredients for a variety of end products.
In October 2021, Universal Corp announced that it had closed on its purchase of Shank’s Extracts, Inc., a specialty ingredient, flavoring, and food company with bottling and packaging capabilities.
Why would the company invest in the plant-based ingredient market?
The competition in that sector is highly fragmented, with 73% of the market spread across companies that each have less than a three-percent market share. In the U.S., there are more than 30,000 food processing facilities owned by 26,000 companies. Fruits and vegetables account for about 10% of the total U.S. food processing industry, implying that there are thousands of facilities and competitors.
With its huge international presence, customer base, infrastructure, and expertise, Universal Corp has the potential to grow that smaller players simply don’t have.
Revenue Up 29% & Net Income Up 15% in Last 9 Months of 2022
Thanks to the global high demand for—and undersupply of—leaf tobacco, Universal Corp continues to report tremendous financial results.
For its fiscal 2023 third quarter (ended December 31, 2022), the company announced that its revenue soared by 22% to $795.0 million as a result of higher tobacco sales volume and prices. (Source: “Universal Corporation Reports Nine Months Results,” Universal Corp, February 8, 2023.)
The company’s fiscal third-quarter net income was $41.7 million, or $1.67 per diluted share, compared to $34.9 million, or $1.40 per diluted share, in the same quarter of fiscal 2022. Its 2023 third-quarter operating income increased by 23.5% year-over-year to $77.5 million.
For the nine months ended December 31, 2022, Universal Corp announced that its revenue increased by 29% to $1.9 billion due to higher tobacco sales volumes and prices—as well as its acquisition of Shank’s Extracts. In the last nine months of 2022, the company’s net income went up by 15.5% year-over-year to $70.3 million, or $2.82 per share. Its operating income in that period increased by 25% year-over-year to $128.7 million, while its adjusted operating income grew by 10% year-over-year to $128.7 million.
Commenting on the results, George C. Freeman, III, Universal Corp’s chairman, president, and CEO, said, “Tobacco shipments are generally moving smoothly, and we are not seeing the logistical constraints that we saw in the prior fiscal year.” (Source: Ibid.)
He added, “Our Ingredients Operations segment also continued to positively contribute to and diversify our results in the nine months and quarter ended December 31, 2022.”
Universal Corp Stock Pays $0.79/Share Dividend
Universal Corp’s high and reliable free cash flow helps the company maintain one of the most enviable dividend plans on Wall Street. The company has raised its dividend annually for the last 53 consecutive years. (Source: “Historical Dividends,” Universal Corp, last accessed May 18, 2023.)
In May 2022, management raised UVV stock’s quarterly dividend to $0.79 per share. It has maintained that payout level over the last four quarters. With the stock trading at $52.19 per share at the time of this writing, that works out to a yield of six percent.
If the company is going to raise its dividend for the 54th consecutive year, it will most likely announce the increase over the coming weeks.
There is every reason to believe the board will do so. In May 2022, Freeman said, “Increasing our dividend remains a key [tenet] of our capital allocation strategy.” (Source: “Universal Corporation Announces 52nd Annual Dividend Increase and Sets Annual Meeting Date,” Universal Corp, May 25, 2022.)
In its most recent investor presentation, the company also said it expects to increase its dividend and return excess capital through share repurchases.
Recent Share-Price Performance
Despite the company’s wonderful fiscal third-quarter results, Universal Corp stock’s price has been experiencing some volatility. As of this writing, UVV stock is down by about:
- Three percent over the last month
- Four percent over the last six months
- 10% year-over-year
On the plus side, Universal Corp stock is up by two percent year-to-date.
Moreover, the stock has a history of bouncing back pretty quickly. Taking advantage of dips in the price of UVV stock has proven to be quite advantageous for investors.
Chart courtesy of StockCharts.com
The Lowdown on Universal Corp
As mentioned earlier, Universal Corp is the leading global leaf tobacco supplier, and it has longstanding relationships with the industry’s biggest names. Furthermore, the leaf tobacco market has large barriers to entry, which helps protect the company’s market share. On top of that, through recent acquisitions, the company has been building out its plant-based ingredient business, which continues to exceed its expectations.
In terms of financials, Universal Corp generates high free cash flow, has a healthy balance sheet, and only requires a small amount of capital investment to maintain its leaf tobacco business. For yield hogs, this points to the company being able to build on its over-50-year tradition of increasing UVV stock’s inflation-busting dividends.