It's absolutely amazing the cultural changes that can take
place within just a few decades.
Several years ago, I was excited to have been given tickets
for boxseats at a crucial baseball game at Yankee Stadium. As I
enjoyed a beautiful day at the ballpark, I noticed that smoking
was permitted and that several of my fellow fans had lit
cigarettes to enjoy with their beer and hot dogs. I decided to
join them by lighting one of my favorite mild Dominican cigars to
savor during the last few innings.
After a few puffs, I heard an angry, high-pitched voice
ordering me to extinguish the cigar. On my right, I noticed a
small child scowling at me. He informed me that his school had
taught him that smoking is bad for you. Not wanting to get into a
philosophical argument with a child (or to upset his rather large
father), I extinguished the cigar and returned to enjoying the
This encounter reminded me of just how fast cultural trends
can change. For instance, in my middle school days, kids not much
older than my young anti-smoking friend were smoking so much that
the restrooms were literally choking hazards. Not to mention it
was the "cool kids" who smoked. Now, smokers have become pariahs,
and many children in the United States are militantly
A recent article by my colleague Joseph Hogue on the "hated"
Philip Morris (
reminded me of the incident at the ballpark. I learned that
despite this company's leading position in a pariah of an
industry, it is held by nearly 1,400 institutionalfunds and has
consistently outperformed themarket . In fact, StreetAuthority
expert Elliott Gue has the company in his "Forever Stocks"
This revelation sparked my interest in looking behind Philip
Morris for other top-performing companies in the tobacco
Over the years, I have learned that for every successful and
popularstock , there are usually several under-the-radar
companies that are also thriving on the success of the well-known
name. These companies can be competitors, partners, or critical
links in the supply chain.
My digging revealed a quality dividend-paying stock that's
part and parcel of Philip Morris's supply chain. Although it is
nowhere as well known as Philip Morris, this company plays a
critical behind-the-scenes role in Philip Morris'
The company is
Universal Corp. (
, a Richmond, Va.-based tobacco merchant and processor with
operations in more than 30 countries. Working directly with
manufacturers of tobacco-based products, Universal specializes in
the financing, selection, processing and storage of leaf
Founded in 1918, the company boasts amarket cap of nearly $1.5
billion and a forward price-to-earnings (P/E ) ratio of just over
12. Universal just posted improved annual results withnet income
rising 44% to nearly $133 million from lastyear andoperating
income up 4% to close to $233 million onrevenue of $2.5 billion.
The company currently pays a quarterlydividend of 50 cents, which
equates to ayield of about 3.5%. The company has increased its
dividend for 42 years in a row, making for an enticing
Universal's customers include Philip Morris,
British American Tobacco (
Imperial Tobacco (
. It has been able to maintain its profits by sourcing tobacco to
meet demand. In other words, most of itsinventory is already
committed tosale . This intelligent strategy helps insulate
Universal from the pressure ofcommodity price risk .
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As you can see, Universal has outperformed its peer group over
the past five years. Universal isn't a fast-risinggrowth stock ,
but it is a solid, dividend producing company that deserves a
place in every longterm dividend growth portfolio.
Technically,shares have been trending up from adouble bottom
formed in April. Price has set up to be an ideal buy as a
breakout entry above $61.50. My 12-month target price is $68 with
an initial stop level at the 50-day simplemoving average of
Risks to Consider:
Despite its strong performance, Universal remains in a pariah
industry. As seen in the United States, consumer tastes can
rapidly change, and possible governmental regulations and
anti-smoking measures could damage profits. In addition, it's
important tonote that leaf tobacco usage has been slowly
declining. Although the company's inventory methods work to
reduce commodity price risk, this risk still remains as a
Action to Take -->
I like Universal right now as a long-term investment. Always
remember to use stops and thatdiversification is the key to
consistent stock market profits.
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