People have been quitting tobacco in ever greater numbers during the pandemic according to GlobalData, an analytics firm. In a recent survey it found that sales of filter cigarettes – the largest selling tobacco product – will drop this year by 8% to $651 billion. So it’s no surprise that Universal Corporation (NYSE:UVV), the leading global tobacco leaf exporter, is feeling the squeeze.
For the last few years, annual revenues have hovered around the $2 billion mark. However, this coming year revenues are forecast to be much lower. This is in part due to decline in demand, but as George Freeman, Universal Corporation’s Chairman and CEO stated in the latest set of results: “Delays in certain operations relating to COVID-19 as well as increased volatility in foreign currency exchange rates had an impact. In the first half of fiscal year 2021, we experienced slowdowns in both tobacco processing and receipt of customer orders for leaf tobacco.”
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Headquartered in Richmond, Virginia, Universal Corporation operates in more than 30 countries spanning five continents. It has a market capitalisation of $1.23 billion and is supplier and intermediary of leaf tobacco, procuring, processing and providing services for tobacco manufacturers. Customers include Altria Group, British American Tobacco (BAT), China Tobacco International and Philip Morris International. It also owns other agri-related businesses.
Universal Corporation has reported earnings declines across all aspects of the business for the six months and quarter ended 30 September 2020. Consolidated revenues for the first half of this year were $692.8 million, down $80 million for the same period last year according to the latest earnings report.
Universal Corporation is still strong on dividends
But for investors looking for dividend income, Universal Corporation could still be attractive. The firm is well known for its dividend consistency: it has 50 or more years of consecutive dividend increases. The dividend yield is currently 6.14%. While that may not be the highest in the industry, it is in line with its peers. By comparison, the dividend yield for Philip Morris is 5.69%, and for Vector Group it is 6.26%. Universal Corporation’s annual current dividend stands at $3.08 per share.
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But analysts are sounding a note of caution. The company has recently approved a program for the repurchase of up to $100 million of Universal Corporation shares of common stock and the dividend is considered high in relation to its profits. The company has made a commitment to continue increasing the dividend, but it remains to be seen whether this is sustainable given the declining profits.
Is it all in the leaves?
While leaf tobacco is still the core business, Universal Corporation is beginning to diversify. In early January 2020, the firm acquired FruitSmart and it is also expanding Universal Ingredients, the plant-based ingredients side of the business. Then in October 2020, the firm acquired Silva International, a dehydrated vegetable, fruit and herb processing company.
Freeman has stated that “with this acquisition, we expect our agri-services businesses to represent 10% to 20% of our EBITDA by fiscal year 2022, ahead of our previously stated target.”
Further down the line, there is talk that BAT is developing a potential coronavirus vaccine made of tobacco leaves. If that is the case, with BAT as one of its largest customers, Universal Corporation might still be one to watch.