Summary
- I think investors would do well starting a position in Universal at these levels.
- In my view, the dividend on this high yield stock is sustainable. Some institutional investors seem to agree given their buying patterns recently.
- My one concern is the valuation. Because the shares are not as cheap as I like, I'll take small position now, with the intention of adding more later.
I think Universal Corp. (NYSE:UVV) is a great buy at these levels, and I’ll go through my reasoning below by focusing on the financial history here, and by inferring some things about the culture based on the dividend history. I’ll try to model a future price based on what I think is a reasonable expectation about future dividends. I’ll then look at the stock itself, admitting that it may be relatively more expensive on a price to free cash flow basis for my comfort. I’ll conclude with an appeal to authority. In sum, I think this dividend king should be in every investor’s portfolio.
Key Drivers
I think there are two key drivers that the company will continue to benefit from in the coming years. First, it is a great “play” on global tobacco. This makes it a particularly good investment for people worried about company specific risk, firms like Universal that sell to the industry might be a better choice. As per the chart below, fully 75% of the company’s sales are to dominant players, each dominant in their local markets, with which the company has great relations.
At the same time, the company is obviously not exposed to the company specific risks of any of these individual names. That suggests that this is a more comfortable way to invest in this controversial industry.
