Dividend Aristocrats Part 4 Of 52: VF Corp (VFC) by Sure Dividend

VF Corp (VFC) is one of the largest publicly traded apparel corporations in the world.

The company was founded in 1899 and now as a market cap of $30 billion.  The company has a long history of success…  And of rewarding shareholders with rising dividends.  VF Corp has paid increasing dividends for 42 consecutive years.

Finding long-term success in the fickle apparel industry is difficult.  American Apparel is the latest example of a large clothing company failing.

The apparel industry is difficult because styles and clothing preferences change.  As they change, brands associated with the ‘old’ style lose their ability to generate strong sales – resulting in high turnover.

VF Corp has found a way to not only stay relevant – but to thrive – for over 100 years.  The company’s 42 year streak of dividend increases is testament to its competitive advantage in the apparel industry.

Competitive Advantage

The story behind VF Corp’s long-term success is the durability of their brands.  The image below shows the company’s major brands:

VF Corp

Source:  VF Corp Investor Relations

Many of the company’s most popular brands have tremendous longevity.  That’s because they exist in slow-changing niche industries of the apparel industry.

As an example, jeans have not changed substantially in the last 100+ years.  The Lee and Wrangler brands take advantage of this fact.  Several of the company’s longer-lived brands are listed below:

  • Lee – founded in 1889
  • Wrangler – founded in 1944
  • Van’s – founded in 1966
  • The North Face – founded in 1966
  • Timberland – founded in 1973

All 5 of the brands listed above generate more than $1 billion a year in revenue.  4 of the 5 brands above are slow-changing.

Jeans change very slowly. Timberland and North Face both cater to the ‘outdoorsman’ – someone who isn’t overly focused on fashion, but rather on quality and durability.

The exception is Van’s, which targets counterculture/skating. The Van’s brand is the outlier of the 5 durable billion dollar brands above as it targets a younger audience and is more susceptible to fashion trends (counter-culture fashion trends, but still fashion trends nonetheless) than the company’s 4 other billion dollar brands.

Growth Potential

VF Corp has shown excellent growth in recent years.

Over the last decade, the company has compounded earnings-per-share at 11.7% a year, and dividends at 16.5% a year.

The company’s main earnings-per-share growth sources over the last decade are shown below:

  • Sales increased at 7.3% a year
  • Net margin increased 3.6% (from 8.0% in 2005 to 11.0% in 2014)

As you can see, sales growth was the primary growth driver, with margin increases contributing significantly to growth as well.

The company’s future growth story centers around international growth. VF Corp generated 34% of its sales internationally in its most recent quarter.

On a currency neutral basis, the company has seen revenue grow 11% in Europe, 17% in the Asia-Pacific region, and 11% in the Americas (not including the United States) over the last year.

For the full fiscal year, VF Corp is expecting sales to grow 8% on a currency neutral basis.  Earnings-per-share are expected to jump 15% on a currency-neutral basis due to more margin improvements.

Over the next several years, VF Corp will likely manage revenue growth of between 6% to 8% a year.

The company has also been more committed to repurchasing shares in recent years.  Over the last 12 months, the company has reduced its share count by 1.5% a year.  I expect VF Corp to continue repurchasing shares and reducing share count by about 1.5% a year.

In addition, the company continues to make meaningful margin improvements.  Over the next several years, margin improvements will likely add between 1% and 3% to bottom-line growth a year.

These 3 factors give VF Corp an expected growth rate of 8.5% to 12.5% a year over the next several years.  The company also has a dividend yield of 1.8% for total expected returns of 10.3% to 14.3% a year.

Recession Performance

As a clothing company, one would expect VF Corp’s  earnings to decline significantly during recessions.

Fortunately, we can test this hypothesis by examining the company’s results over the fairly recent Great Recession of 2007 to 2009.

  • 2007 earnings-per-share of $1.35 (new high)
  • 2008 earnings-per-share of $1.39 (new high)
  • 2009 earnings-per-share of $1.29 (recession low)
  • 2010 earnings-per-share of $1.61 (new high)

Earnings-per-share declined just 7.2% during the worst of the Great Recession.  VF Corp recovered rapidly – the company hit new earnings-per-share highs the next year.

VF Corp’s 42 year dividend streak and excellent performance over the Great Recession prove that the company is recession resistant – unlike more fashion-centric apparel companies.

Fair Value

VF Corp is currently trading for a price-to-earnings ratio of 23.0 using adjusted earnings.  The company is more expensive than average – the S&P 500 is currently trading for a price-to-earnings ratio of 20.3.

VF Corp’s higher price is a reflection of its higher quality and better-than-average total return prospects over the next several years.

The company currently has a dividend yield of 1.8%.  Over the last decade, VF Corp’s average dividend yield has been around 2.6%.

On a historical basis, now is not the time to buy VF Corp.  When the company’s dividend yield rises to around 2.5% or higher, the company will make a more compelling purchase.

At current prices, VF Corp has a dividend payback period of 20 years.

Final Thoughts

VF Corp is one of the two highest-quality dividend growth apparel companies – the other being Nike (NKE).

I have little doubt VF Corp will continue compounding its dividends and earnings far into the future.  The company’s performance over recessions is especially impressive and shows the resilience of its brands.  VF Corp is an ‘all weather’ apparel company – the company does well regardless of the economic climate.

Still, just because a business is of a very high quality does not make it an excellent investment.  What you pay for the business matters.  VF Corp is currently offering dividend investors a yield well below its historical average.

When this company runs into some sort of temporary trouble – or when investor sentiment changes – it will become an excellent buy.  It’s relatively low yield at current prices makes VF Corp a hold rather than a buy using The 8 Rules of Dividend Investing.