I last analyzed Universal in 2011, concluding that: "future dividend growth will be constrained by the lack of visibility concerning the company’s future earnings prospects".
I wanted to analyze the company once again, and refresh my understanding, after the most recent dividend increase last week.
The company's press release said that this is the 50th consecutive annual dividend increase. (Source).
I disagree with the company's statement. Universal has only increased dividends for 49 years in a row.
I wanted to evaluate this statement, because it would have meant that Universal would have been eligible to join the dividend kings.
The recent press release is also inconsistent with prior press releases they have made. The one from 2018 stated that they have increased dividends for 47 years in a row. (Source)
I went ahead and tried to look for dividend increase history on the company's website. If they could show that they increased annual dividends each year, since 1970, I would have agreed with them. Unfortunately, they only show dividend history since late 1971. Therefore, their website does not show enough information to support management's claim that they have hiked dividends for 50 years in a row.
I then went ahead, and research Mergent's historical archives for Universal Corporation. This showed me that the company kept annual dividends unchanged betwee 1969 and 1971. It wasn't until 1972 that Universal started growing dividends every single year. If the company raises dividends in 2021, it would be eligible to become a dividend king. Until then, their annual dividend record is at 49 years.
During the past decade, Universal had managed to increase dividends at an annualized rate of 5.10%.
The company has been unable to grow earnings per share during the past decade. This fact explains the slow pace of dividend growth. It may also explain to you why I am not excited about the company's long-term prospects.
The company's results for 2019 were low, due to one-time events. Excluding those would have resulted in adjusted earnings per share of $3.49, which is still the lowest performance in a long time.
This is not just a short-term problem. Based on data from GuruFocus, Universal has been unable to grow earnings per share for over 20 years. Without growth in earnings per share, future dividend increases will be limited. As a higher and higher portion of earnings are paid out as distributions, there is little left to grow the business, and there is less margin of error to protect the dividend stream from a cut, when there is the occasional bump in the road.
When you look at the dividend payout ratio, you can see a steady increase over time. The increases in 2016 and 2019 are driven by one-time events, which reduced earnings per share. If you exclude one-time events from 2019 results, we end up with earnings per share of $3.49, which would have resulted in a high payout ratio of 86%.
The company has repurchased roughly 15% of shares outstanding during the past decade. Despite this, earnings per share still went down during the past decade.
Right now, the stock is selling for 15.40 times earnings, yields 7%, but has a very high payout ratio. The lack of earnings growth was the reason I sold the stock in 2013. It is the reason why I am not interested in the stock today either. My last analysis of Universal was a decade ago, and it warned that future prospects are
Relevant Articles:
