Universal (NYSE:UVV) Is Increasing Its Dividend To $0.82

Universal Corporation (NYSE:UVV) will increase its dividend on the 4th of August to $0.82, which is 1.2% higher than last year's payment from the same period of $0.81. This takes the annual payment to 5.5% of the current stock price, which is about average for the industry.

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Universal's Future Dividend Projections Appear Well Covered By Earnings

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, Universal's dividend was only 64% of earnings, however it was paying out 119% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS could expand by 7.9% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 62%, which is in the range that makes us comfortable with the sustainability of the dividend.

Check out our latest analysis for Universal

Universal Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The annual payment during the last 10 years was $2.04 in 2015, and the most recent fiscal year payment was $3.24. This means that it has been growing its distributions at 4.7% per annum over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

We Could See Universal's Dividend Growing

Investors could be attracted to the stock based on the quality of its payment history. Universal has impressed us by growing EPS at 7.9% per year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Universal will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Universal is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for Universal (of which 1 makes us a bit uncomfortable!) you should know about. 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.