Here's Why You Need Universal Corp in Your Portfolio

Universal is somewhat of a misunderstood company, but it has unprecedented access to the world's tobacco market.

Feb 28, 2014 at 10:21AM

Universal Corp (NYSE:UVV) is something of a misunderstood company. For this reason, investors tend to look toward Reynolds American (NYSE:RAI) or Lorillard (NYSE:LO) as their play on the tobacco sector. That's why in this piece I'm going to try and explain what Universal does and how the company is a great fit for any income-seeking investor. 

Universal knows what it's doing
Founded back in 1918, Universal has become a world leader in the supply of tobacco leaves to major industry players. And it's taken a while to get here; Universal has built up a network of farmers, distributors, and customers, all of which rely on the company's logistical supply network to get the tobacco to factories in time.

For this international network, Universal employees 25,000 farmers. It is responsible for around 40% of Africa's tobacco production, 30% of North America's production, and 25% of Brazil's production. Think of Universal as a middle man and an essential service for farmers; Universal buys their crops, process the tobacco, and then sells it on to big tobacco companies.

Furthermore, Universal's customers are no small players; the company's biggest customers are Philip Morris and China Tobacco, the two dominant forces in the global tobacco market. These two behemoths account for 58% of the global market.

Actually, this is really important, as China Tobacco is a state-owned company. Therefore, Universal is the only way private investors can get any real access to the domestic Chinese tobacco market -- the fastest-growing tobacco market in the world. Indeed, between 2012 and 2015, it is expected that the volume of cigarettes sold within China will have increased by 1.5% to 2.5%, and Universal is set to benefit from this.

It's not all good news
Unfortunately, as Universal is involved in growing tobacco, its business is somewhat seasonal due to the nature of crop timings, drought, yields, etc. As a result, income and revenue are somewhat unpredictable and revenue has not really grown over the past five years. The company's profit margin before interest and taxes has also varied from 10.3% to 7.4%.

Nonetheless, Universal is an extremely well-managed company, and a robust free cash flow more than makes up for lackluster income expansion. Free cash flow has been in the region of $189 million to $269 million per year for the last five years. In addition, net debt to equity is low at only 32% compared to the tobacco sector average of 100% to 200%.

Moreover, the company has increased its dividend payout every year for the past 43, making Universal one of the market's dividend aristocrats. The company's management authorized aggressive stock repurchases in the period 2008 to 2010, when the market was extremely depressed; this shows that management is using investor cash wisely and is not throwing it away repurchasing expensive shares.

If you can't beat them, join them
However, one of the most disruptive technologies to emerge during the past decade is the electronic cigarette, which poses a huge threat to Universal's business model.

As the saying goes, though, if you can't beat them, join them. That's exactly what Universal has done. Universal's subsidiary, Virginia Tobacco, has joined with Avoca, one of the world's premier botanical extraction companies, to form AmeriNic. AmeriNic's goal is to produce liquid nicotine for the electronic-cigarette industry. The company is focusing on producing high quality, United States Pharmacopeia- grade liquid nicotine using fully traceable and compliant tobaccos.

This partnership is a really exciting endeavor for Universal. Expansion into electronic cigarettes opens up a huge new market for Universal, allowing the company to benefit from the global drive by all major tobacco companies to bring electronic-cigarette offerings to market. With every tobacco company trying to get in on the act of electronic-cigarette production, Universal should be able to easily acquire customers.

This should drag Universal into the 21st century, bringing it into line with domestic peers such as Lorillard and Reynolds American, both of which already have electronic-cigarette products on the market.

The competition
Lorillard's electronic offering comes in the form of blu eCigs, which held a 47% share of the domestic market throughout 2013. Sales of blu totaled $230 million during 2013. Sadly, Lorillard reported a net profit of zero for e-cigs for full-year 2013 due to a higher marketing spend; although for the first nine months of 2013, the company reported income of $9 million. As a result, income from blu did not count toward Lorillard's total net income of nearly $1.2 billion for the year.

Still, with tobacco sales declining, and when marketing costs fall, this could be a lucrative business segment for the company. At the end of the third quarter, Lorillard acquired SKYCIG, a British-based e-cig business .

Meanwhile, Reynolds American is also active in the not-tobacco nicotine sector. Reynolds' subsidiary Niconovum USA has entered its first lead market in the United States with Zonnic, a nicotine-replacement therapy gum, while another subsidiary, R.J. Reynolds Vapor, has introduced electronic cigarette Vuse, which has limited distribution.

Foolish summary
So all in all, Universal is an integral part of the global tobacco supply network, offering exposure to the still-expanding Chinese cigarette market. Additionally, Universal has been paying and increasing its dividend for 43 consecutive years, a record that is tough to beat. Management has also undertaken well-timed buybacks. Overall, Universal's dominant market position and cash returns are something investors should be interested in.

Not interested in Universal's dividends?
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


Rupert Hargreaves owns shares of Universal. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers