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Before I begin, I feel I must first warn readers that you may become hooked on the company I am about to unveil. And no I do not mean on the products they help to produce. (Although you may or may have already developed the habit) Rather, I am talking about the fact that you may become hooked on this consistent performer that has operated according to strong strategic principles and has consistently created value for its shareholders. I am talking about Universal Corporation (UVV)/., the leading global leaf tobacco supplier.

Universal Corporation does not manufacture cigarettes or other smokeless tobacco products. It is a merchant and processor of leaf tobacco. Universal processes various kinds of tobacco - flue-cured, burley, oriental, and dark air-cured - all of which are primarily used in the manufacture of cigarettes, cigars as well as pipe and smokeless tobaccos.

This article is tailored for my fellow value investors wondering if Universal's relentless efforts to reward shareholders are going unnoticed, and whether Universal deserves further analysis.

Dividend History

Universal declared its most recent dividend of $0.50 on April 4. With the next two quarterly dividends expected to remain the same, Universal will have paid $2.00 per share in dividends to its shareholders in 2013. With a dividend yield of 3.47%, the world's leading leaf tobacco supplier outpaces the Standard and Poor' 500 and S&P consumer staple yield averages of 2% and 2.86%, respectively. Furthermore, Universal has increased its dividend by 5.57% over its entire history. If Universal can continue to sustain a cash flow growth rate of 2-5%, it should have no problem increasing its dividend without having to increase its payout ratio. Universal Corporation's ability to increase its dividend for the last 42 years can be attributed to Universal's core competencies such as strategic market position, strong management and social responsibility.

Industry

Universal stacks up nicely with its competition in terms of value. Universal's direct competition based on market capitalization consists of Alliance One Intl (AOI), Lorillard Inc. (LO), Reynolds American (RAI), and Vector Group Ltd. (VGR) Other larger competitors include Altria Group (MO), British American Tobacco (BTI), and Philip Morris (PM). Universal currently has the lowest price to earnings and debt to equity ratios among its competitors and unlike its direct competition it is featured on the U.S. Dividend Champions List. I believe Universal's core competencies and low debt position the company perfectly to effectively compete with its competition. Universal's practice of maintaining sound and ethical supply chain practices will give the world's leading leaf tobacco merchant a sustainable competitive advantage as well as supply chain integrity throughout the production process.

Global Tobacco Production

In 2012, global flue-cured tobacco production increased 1.9% over 2011's level. 2012's global tobacco crop marked the highest level of production in 16 years. Moreover, flue-cured tobacco crops from all global tobacco exporters beat the previous ten year (2002-2011) production average by 4.2%. Add to this the fact that Universal's flue-cured and burley segment accounted for 90% of revenues in fiscal year 2012. Since Universal is a dominant player in the purchasing and processing of flue-cured and burley tobacco in major tobacco exporting regions like Africa and Brazil, investors should be very encouraged by these recent trends. Increased global tobacco production should cause downward pressure on tobacco prices and an increase in overall demand.

Valuation

When I checked the valuation ratios of Universal, I was pleasantly surprised by the fact that I happened to find a Dividend Champion that was nearly selling for less than its book value. Universal's price to book ratio of 1.08 is the fourth lowest on the most recent Dividend Champion List. Universal's share price is trading at 54% of total sales per share and just above 7.5 times price to cash flow. Moreover, as previously mentioned, Universal is the lowest among its peers in terms of price to earnings. Based on a 5% free cash flow growth rate, 10% discount rate, 3.5% terminal growth rate, and 6.5% capitalization rate, I have calculated the fair value of Universal's share price to be $81.35.

Financials

Universal's long term reputation as a consistent, compliant tobacco supplier has spoken for itself in the company's recent financial results. In the past five years revenue and net income have grown 4.4% and 5.54%, respectively. Furthermore, net profit margin and return on equity have averaged a solid 5.53% and 14.83%, respectively, since 2008. Universal also strengthened its balance sheet by hedging its exposure to loss of inventory while at the same time adding to its cash pile.

Conclusion

Universal will continue to prosper not only because of their competitive advantages, but also because commodity prices are falling, pricing movements are encouraging, and management has remained determined to reward their shareholders. What's more, I believe government regulations are helping Universal and the tobacco industry as a whole because restrictions on advertising and packaging have stabilized market positioning among the tobacco companies. Furthermore, government regulations have made it difficult for new competitors to enter the market place. The intangible value of Universal's long standing business relationships built on trust and integrity are difficult to appraise. That being said, I believe they play an essential role in Universal's position as the leading leaf tobacco supplier in the world. 75% of Universal's sales volume is generated from companies with which Universal has solid long-term relationships and that have market-leading positions.

I believe that Universal's core competencies coupled with lower prices and increased demand have the potential to send Universal's share price in the mid-$60 range in the relatively near future. If you are looking to add consistent value to your portfolio look no further than Universal Tobacco to get your next hit.

Source: Confessions Of A Value Addict: My Next Fix? Universal Corp.