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Universal Corporation (NYSE:UVV) stock is about to trade ex-dividend in 4 days time. If you purchase the stock on or after the 4th of October, you won't be eligible to receive this dividend, when it is paid on the 4th of November.
Universal's next dividend payment will be US$0.8 per share, on the back of last year when the company paid a total of US$3.0 to shareholders. Based on the last year's worth of payments, Universal stock has a trailing yield of around 5.6% on the current share price of $54.52. If you buy this business for its dividend, you should have an idea of whether Universal's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
Check out 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. Its dividend payout ratio is 81% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth 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. Fortunately, it paid out only 41% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see how much of its profit Universal paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Universal's earnings per share have dropped 8.5% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Universal has delivered 5.1% dividend growth per year on average over the past ten years. 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 81% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.