Universal (NYSE:UVV) Has Announced That It Will Be Increasing Its Dividend To US$0.79

Universal Corporation (NYSE:UVV) has announced that it will be increasing its dividend on the 1st of August to US$0.79. The announced payment will take the dividend yield to 5.1%, which is in line with the average for the industry.

View our latest analysis for Universal

Universal's Payment Has Solid Earnings Coverage

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. This is a pretty unsustainable practice, and could be risky if continued for the long term.

Looking forward, earnings per share could rise by 31.7% over the next year if the trend from the last few years continues. If the dividend continues along recent trends, we estimate the payout ratio will be 73%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Universal Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2012, the dividend has gone from US$1.92 to US$3.16. This works out to be a compound annual growth rate (CAGR) of approximately 5.1% a year over that time. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.

Dividend Growth Could Be Constrained

Investors could be attracted to the stock based on the quality of its payment history. Universal has impressed us by growing EPS at 32% per year over the past five years. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Universal hasn't been doing.

Our Thoughts On Universal's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Although they have been consistent in the past, we think the payments are a little high to be sustained. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Universal (1 is potentially serious!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.