Monday, April 11, 2016

Adding Universal Corporation

I added shares of Universal Corporation to the portfolio on Friday.  Many people are probably asking who?  Universal Corporation(UVV) is the largest publicly traded provider of tobacco leaf in the USA, and has substantial operations overseas. In a nutshell the company basically connects farmers to the largest tobacco manufacturing companies by procuring, processing, and storing tobacco. The company was founded in 1888 and is headquartered in Richmond, Virginia.

While it's mainstay procuring and processing operations account for the bulk of company revenues and earnings, UVV has branched out into other areas including some recently.  The company provides testing and blending services to customers. The company employs crop management solutions through their proprietary Mobileaf system used on tablets. The company has expanded into providing vapor liquids to capitalize on the growing field. Additionally  in 2015 the company entered a new business to produce high-quality dehydrated and juiced fruits and vegetables.

UVV isn't a blockbuster growth stock by any means. It's quietly worked under the radar in the industry for many years. Also since the company does not actually sell finished tobacco products it is not under the same scrutiny as MO, PM, or BTI. It is however subject to the same trends of declining tobacco use on a percentage of population basis especially in developed markets. The stock has also under-performed in the small cap space the last 5 years.

The balance sheet is actually very good. The company sports a current ratio of 5.71! Also total assets and liabilities come to 2.62, and when I take out goodwill/intangibles I get 2.50.  That signifies to me the company isn't very leveraged, and takes a prudent approach to keeping a strong balance sheet.

Revenues during 2009-2015 have been flat to declining while bouncing between $2.2-$2.5 billion each year. Operating margins have ranged from 7.4%-10.3% during the same time. The company has a net income percentage that normally does not go much higher 5%.  So for every $100 in sales we are left with $5 in profits at the end of the day.

EPS growth for the last 10 years has also been non existent by my calculations.  Investors have realized a scant 1% average rise in EPS from 2005-2015. 2015 EPS came in at $4.06/share.  I bet by now most people are wondering why I'm even considering this company and I haven't even mentioned other operating metrics.

The one bright spot is the dividend has been paid and raised for 45 years.  That's an impressive streak all on its own.  Now of course more downside. The payout has increased on average by only 2.15% the last 10 years. That's generally not seen as very strong considering plenty of blue-chips increase their payouts by 5% or more on average each year.

So why am I even buying this company?

The short answer is because of the stability offered by this company.  While it's not exactly a blue-chip the company exhibits well managed stability and dividends that are very dependable. I mentioned the other day that I'm looking for more quality.  The nice fat 4% dividend yield will provide that.  Of course I could add to EMR or IBM which are prime examples of blue chips that recently yielded 4%.  I am actively looking to add shares of each company.  There is also a small part of me that is thinking this overlooked company might even begin to outperform its historical self, but not necessarily the overall market.  Either way I see the downside as very low, and any additional upside will be a welcome surprise.

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