6%-Yield Universal Corp Stock’s Price 15% Higher on Strong Results
November 20, 2023
UVV Stock Is a “Sin” Stock that Rewards Investors
I’ve said it before, and I’ll say it again: there are no recession-proof stocks. There are, however, recession-resistant stocks and stocks that rebound more quickly than the broader market. That’s what makes Universal Corp (NYSE:UVV) so compelling.
Sure, it’s considered a “sin” stock because the company operates in the tobacco industry, which might be an issue for some. But some of the best defensive plays are so-called sin stocks—that is, shares of companies that operate in sectors that some consider to be unethical, such as alcohol, tobacco, gambling, or arms manufacturing.
Universal Corp, though, is more on the fringes of the sin stock universe. It’s a great play for those who don’t want to get their hands too dirty in the tobacco business.
The Richmond, Virginia-based company is the world’s leading global supplier of leaf tobacco, but its recent “plant-based” acquisitions position it as more of an agricultural business. (Source: “Investor Presentation: Fiscal Year 2024,” Universal Corp, August 2, 2023.)
The company, which has operations in more than 30 countries on five continents, provides agronomy support, research, and financing to tobacco farmers. It doesn’t manufacture consumer tobacco products, though. It’s the go-between operator between tobacco growers and tobacco product manufacturers.
Universal Corp procures, processes, packs, stores, and ships flue-cured (dried in curing barns) leaf tobacco, burley, and oriental tobaccos that are mainly used to manufacture cigarettes, cigars, cigarillos, pipe tobacco, and smokeless tobacco products.
Each year, the global tobacco industry produces about 5.3 trillion cigarettes. Of that number, less than five percent is sold in the U.S. That’s why you probably aren’t familiar with all of its customers.
More than two-thirds of the company’s tobacco sales are to clients with major positions in their respective markets and longstanding relationships with the company.
Some of Universal Corp’s biggest customers are Altria Group Inc (NYSE:MO), British American Tobacco PLC (NYSE:BTI), China Tobacco International Inc., Japan Tobacco Inc., and Philip Morris International Inc. (NYSE:PM).
Plant-Based Acquisitions
The future of Universal Corp isn’t all tobacco, which is a good thing, since more and more people have been shunning cigarettes, cigars, and pipes. That’s why the company explores opportunities outside the leaf tobacco business.
Part of Universal Corp’s capital allocation strategy since 2018 has been to invest in and develop its plant-based ingredient platforms.
The company says it provides “a variety of value-added manufacturing processes to produce high-quality, specialty vegetable- and fruit-based ingredients as well as botanical extracts and flavorings for the food and beverage end markets.” (Source: “Universal Corporation Reports Second Quarter Results,” Universal Corp, November 2, 2023.)
Over the last few years, it has acquired various plant-based product companies.
For instance, in early 2020, Universal Corp announced that it had completed its acquisition of FruitSmart, Inc., an independent specialty fruit and vegetable ingredient processor. FruitSmart supplies a broad set 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 processes natural raw materials into custom-designed dehydrated vegetable-based and fruit-based ingredients for a variety of end products.
In October 2021, Universal Corp closed on its purchase of Shank’s Extracts, Inc., a specialty ingredient, flavoring, and food company with bottling and packaging capabilities.
Now, why would Universal Corp invest in the plant-based ingredient market?
The sector’s competitive landscape is highly fragmented, with 73% of the market spread across companies with less than a three-percent share. In the U.S. alone, 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.
With its huge international presence, customer base, infrastructure, and expertise, Universal Corp has business growth opportunities that the smaller players simply don’t have.
Another Quarter of Record Revenues
Universal Corp announced that its revenues in the second quarter of its fiscal 2024 (ended September 30, 2023) slipped by less than one percent year-over-year to $638.5 million. Its revenues in the first six months of the year went up by seven percent year-over-year to $1.16 billion. (Source: Ibid.)
The company’s operating income from its Tobacco Operations segment went up by 55% year-over-year in its fiscal second quarter and 46% year-over-year in the first six months of 2023. The operating income from its Ingredients Operations segment went up by 6.6% year-over-year in its fiscal second quarter but went down by 69% year-over-year in the first six months.
The company’s fiscal second-quarter net income advanced approximately 29% to $28.1 million, or $1.12 per share. In the first six months of the year, its net income went down slightly to $26.0 million, or $1.04 per share.
Adjusted for one-time gains and costs, its fiscal second-quarter earnings came in at $1.21 per share.
Commenting on the results, Universal Corp’s chairman, president, and CEO, George C. Freeman, III, said, “Our fiscal year 2024 is developing very well with operating income for the six months and quarter ended September 30, 2023, up 30% and 46%, respectively, compared to the six months and quarter ended September 30, 2022.” (Source: Ibid.)
Freeman noted that Universal Corp’s uncommitted tobacco inventory level of 12% as of September 30 was low, and that the global leaf tobacco supply continued to be tight for all types of tobacco.
Freeman said he expects that, similar to in fiscal year 2023, the company’s tobacco shipments will be strongly weighted to the second half of fiscal year 2024. He also expects that the company’s uncommitted tobacco inventory levels will remain low for the rest of its fiscal 2024.
53rd Annual Dividend Increase
Universal Corp stock might not be as well known as other blue-chip stocks, but it has a long history of returning value to shareholders through dividends and share repurchases.
In May, the company declared a quarterly dividend of $0.80 per share, up from $0.79 per share in the same period of 2022. (Source: “Universal Corporation Announces 53rd Annual Dividend Increase and Sets Annual Meeting Date,” Universal Corp, May 24, 2023.)
That increase represents the 53rd consecutive year in which the company has raised its dividend.
In early November, management declared a quarterly dividend of $0.80 per share, for a yield of 6.22%.
UVV Stock’s Price Ripped Higher
Universal Corp stock has been rewarding buy-and-hold investors with share-price appreciation for decades. Since the start of the new millennium, UVV stock’s price has rallied by 470%. Over the same period, the S&P 500 has provided returns of just 198%.
Universal Corp stock’s climb hasn’t been entirely smooth, but it has a history of bouncing back pretty quickly. In fact, taking advantage of share-price dips has proven to be quite advantageous for investors.
In early November, in the days after the company reported solid financial results and announced strong industry guidance, UVV stock soared by more than 15%, hitting an intraday high of $52.40 on November 7.
Currently trading at its highest level since May 2023, Universal Corp stock is up by:
- 15% over the last month
- 6.3% year-to-date
- 2.0% year-over-year
Chart courtesy of StockCharts.com
Wall Street believes UVV stock will build on these gains over the coming quarters. Analysts have provided a median 12-month share-price estimate of $59.00, which points to potential gains of roughly 13%.
The Lowdown on Universal Corp
As mentioned earlier, Universal Corp is the leading global leaf tobacco supplier. It has longstanding relationships with the industry’s biggest names.
The defensible leaf tobacco market has strong barriers to entry, and the company—through its recent acquisitions—has been expanding its plant-based ingredients business, which continues to exceed its expectations.
Thanks to Universal Corp’s proven history of generating free cash flow, it has been able to annually increase its inflation-thumping dividends for more than 50 years. Moreover, management has said that, when there are no investment alternatives to create shareholder value, it will return excess funds to its shareholders. Another bonus for dividend hogs.
