Why It Might Not Make Sense To Buy Universal Corporation (NYSE:UVV) For Its Upcoming Dividend
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Universal Corporation (NYSE:UVV) is about to go ex-dividend in just 4 days. You can purchase shares before the 9th of April in order to receive the dividend, which the company will pay on the 4th of May.
Universal's upcoming dividend is US$0.76 a share, following on from the last 12 months, when the company distributed a total of US$3.04 per share to shareholders. Based on the last year's worth of payments, Universal stock has a trailing yield of around 7.0% on the current share price of $43.61. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
View our latest analysis for Universal
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 87% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Universal generated enough free cash flow to afford its dividend. Over the past year it paid out 132% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
While Universal's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Universal to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Click here to see how much of its profit Universal paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Universal's earnings per share have dropped 9.6% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Universal has lifted its dividend by approximately 5.1% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Universal is already paying out 87% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Is Universal an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not that we think Universal is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Universal and want to know more, you'll find it very useful to know what risks this stock faces. For example - Universal has 1 warning sign we think you should be aware of.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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