We wrote about Universal Corporation (NYSE: UVV) in August of last year, when we reviewed the key metrics that make up the company’s dividend. UVV is a closely watched stock due to a 50+ year dividend record and exceptional dividend yield of 5.5%+. Our research at the time regarding the dividend looked promising and tied well to the uptrends we were seeing on the technical chart. Universal shares are up just over 8% since we wrote that August article just over 5 months ago.
Followers of our work will be aware that we place a lot of importance on MACD buy signals on long-term charts (due to the amount of information digested), and that’s what played out here once. once again. UVV recorded a buy signal on the weekly chart last year through a MACD crossover on oversold conditions. Stocks confirmed a bottom soon after, but there should be plenty of leg left in this current rally as the technical indicator is now only entering positive territory.
As we can see above, stocks are now coming up against long-term resistance that dates back to 2017. If stocks can break through convincingly, then this area will immediately become long-term support for UVV stocks. Therefore, to assess whether we are indeed correct in our technical analysis, another area for long-term investors to consider in addition to the dividend is the financial condition (balance sheet) of Universal Corporation. Encouraging trends here would certainly reinforce the bullish case for UVV.
Cash and cash equivalents
Total cash and ST investments were nearly $101 million in the second quarter (fiscal 2022). With a market cap of $1.369 billion, UVV currently trades for just under 14x cash, which is actually higher than what we’ve seen at Universal in recent years. With a cash balance of just under $100 million, Universal is holding less cash than usual.
Therefore, it is important to monitor liquidity by looking at the current ratio. This ratio is essentially a solid read on UVV’s ability to service its short-term debt should it do so for unforeseen reasons. We calculate this ratio by dividing Universal’s current liabilities by its current assets. In the company’s last quarter, the current ratio was 4.15. Again, interestingly, we see a downward trend over the past few years. Additionally, if we remove Universal’s inventory from the equation, we get a quick ratio of 1.15 which is significantly lower than its 5-year average.
What’s the problem here? Well, while Universal’s assets have held fairly steady above $1.6 billion, inventory now accounts for $1.015 billion of that total. This presents a risk on the table as Universal’s inventory now accounts for nearly 50% of the company’s annual sales (TTM). Suffice to say that this trend deserves to be watched over the coming quarters.
Universal’s non-current assets consist primarily of property, plant and equipment ($369 million), equity and investments ($85 million), goodwill ($173 million), and intangible assets ($68 million). of dollars). PPE has been pretty stable lately, which is what we generally like. Goodwill has only recently appeared on the balance sheet through acquisitions, so it will be interesting to see if this item proves itself in the income statement over time.
return on assets
To see how effective Universal’s assets are at generating profits, we turn to measuring asset performance. As we can see from the chart below, the ROA started to rise last year when we got this MACD crossover. On a trailing 12-month average, Universal’s ROA is just over 4%, which means we’re still over 6% of Universal’s 5-year average. Suffice it to say, Universal’s assets are actually underperforming right now, so we should see a lift here to bring us back towards the average.
Short-term debt versus long-term debt
At the end of the third quarter, Universal’s short-term debt stood at $185 million while long-term debt stood at $518 million. Currently, the cash balance does not cover short-term debt, which is why we always prefer higher cash trends and less inventory rather than the other way around. Universal’s debt-to-equity ratio was 0.41 in the second quarter, again showing an upward trend over the past five years. The impact of this debt is reflected in the income statement by the downward trend in the interest coverage ratio, which now stands at 6.5 on an average of the last twelve months.
Equity stood at $1.297 billion at the end of the last second quarter, which means there has been little change in net worth over the past 5 years. Additionally, inventory, goodwill and debt have all increased (as a percentage of related equity) over this period, which adds more risk to the table. The question then becomes whether the large dividend is the right course of action from a longevity perspective for Universal. Dividend investors also like to see strong capital gains on their positions, but stock price appreciation becomes difficult over the long term when equity is not growing on the balance sheet.
So, to sum up, based on the trends we discussed above, we don’t think stocks will have the momentum to break above long-term resistance on this current rally. Liquidity and solvency trends have weakened somewhat as management continues to pump more than $70 million a year into the dividend. We look forward to continued coverage.