Universal Corporation's (NYSE:UVV) dividend will be increasing to US$0.78 on 2nd of August. Based on the announced payment, the dividend yield for the company will be 5.5%, which is fairly typical for the industry.
Universal Doesn't Earn Enough To Cover Its Payments
Unless the payments are sustainable, the dividend yield doesn't mean too much. The last payment made up 87% of earnings, but cash flows were much higher. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Looking forward, EPS could fall by 3.1% if the company can't turn things around from the last few years. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 97%, which is definitely a bit high to be sustainable going forward.
Universal Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. Since 2011, the first annual payment was US$1.88, compared to the most recent full-year payment of US$3.12. This means that it has been growing its distributions at 5.2% per annum 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 Is Doubtful
Investors could be attracted to the stock based on the quality of its payment history. However, initial appearances might be deceiving. Over the past five years, it looks as though Universal's EPS has declined at around 3.1% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
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. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to it. We would probably look elsewhere for an income investment.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 1 warning sign for Universal that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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