VF Corp (VFC): 43 Years of Dividend Growth In A Fickle Industry

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VF Corp (VFC): 43 Years of Dividend Growth In A Fickle Industry by Ben Reynolds

VF Corp (VFC) has a long history of success; it was founded in 1899 and now boasts a market cap of $26.5 billion.

VF Corp has found success in the fickle apparel industry…  This is notoriously difficult due to constantly changing trends in the industry.

Despite this, VF Corp has found a way to reward shareolders decade after decade.  The company is a Dividend Aristocrat with 43 consecutive years of dividend increases.

This article takes a look at the current events (both good and bad) of VF Corp.  It examines the company’s future growth prospects, valuation, and recession resistance.

Keep reading to learn more about the investment prospects of VF Corp.

Current Events

VF Corp’s management is analyzing the company’s brand portfolio and selling off non-key brands.  To this end, the company recently announced it is selling its ‘contemporary brands business’ to  Delta Galil Industries for $120 million.

The brands sold include:

VF Corp’s CEO Eric Wiseman said the following about the transaction:

“Earlier this year we said that we are taking a focused and proactive look at the composition of our business portfolio to ensure that we are well positioned to maximize VF’s growth and return to our shareholders. This announcement illustrates that our work as active portfolio managers is progressing.”

The contemporary brands business generated $344 million in revenue and $15 million in operating income.  The division has been struggling, with deep declines in both revenue and operating income.  VF Corp is selling these brands at a ‘low’, not a high.  With that said, the move allows the company to focus its energies and advertising budget on more successful brands.

The divestiture is likely not the company’s last.  VF Corp is also looking to sell its licensed sports group.  The licenses sports group creates branded apparel products with major sport and college logos.

The licenses sports group is performing well, with revenue increasing in the ‘mid teens’ according to management in the company’s most recent quarter (2nd quarter, 2016).

Overall, 2nd quarter results were mediocre.  The company saw revenue from continuing operations grow just 1%.  Adjusted earnings-per-share grew 5.9%.

The company is experiencing weakness in the following:

  • Timberland saw revenue decline 7%
  • Workwear revenue declined in the ‘high single digits’ (7% to 9%)
  • Sportswear revenue declined 19%

These are the negative spots for VF Corp this quarter.  The Workwear revenue decline is expected due to low oil prices which reduce needs for corporate uniforms in the oil and gas sector.

The decline in Timberland and Sportswear is more troubling.  It shows that VF Corp is losing ground (in a big way) to Nike (NKE) and UnderArmour (UA) in the lucrative sportswear segment.  The Nautica and Kipling brands are suffering.

Despite the negativity surrounding these brands, the overall future is positive for VF Corp.  The company did see positive revenue and adjusted earnings-per-share growth in its most recent quarter.

4 of the company’s 5 billion dollar brands showed positive growth:

  • Lee constant currency revenue up 10%
  • Wrangler constant currency revenue up 4%
  • Van’s constant currency revenue up 6%
  • The North Face revenue up 2%
  • Timberland revenue down 7%

In total, VF Corp is expecting 11% currency neutral earnings-per-share growth in fiscal 2016.  Without adjusting for currencies, earnings-per-share are expected to grow 5%.

Competitive Advantage

VF Corp has paid increasing dividends for 43 consecutive years.  This shows the company has a strong and durable competitive advantage.

The company has achieved success for so long by focusing on iconic, timeless brands that are less subject to changing consumer tastes.

An excellent example are blue jeans.  Jeans have not changed tremendously in the last 100+ years.  The Lee and Wrangler brands have remained strong for decades.

In total, VF Corp has 5 brands that generate more than $1 billion a year in sales.  The date these brands were founded are shown below:

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

Timberland, North Face, Lee, and Wrangler all cater to a demographic that is less focused on staying up with the latest fashion trends.

The exception to this is Van’s, which targets consumers in the counterculture/skater vertical.  The Van’s brand is the lone outlier of the 5 above which (in general) have staying power.  Nonetheless, Van’s has shown its brand is just as able to command growth over decades as the 4 listed above.

Growth Potential & Total Return

Do not let mediocre current results obfuscate the big picture.  VF Corp has a long history of strong growth.

The company has compounded earnings-per-share at 11% a year over the last decade.  Dividends have growth even faster, at a 15.5% clip.

The company’s earnings-per-share growth over the last decade has come from:

  • Sales growth
  • Margin improvements
  • Reduction in net shares outstanding

Margin improvements are a result of ever greater economies of scale.  As VF Corp’s size increases, its overhead as a percentage of sales decreases.

Future growth for VF Corp will come disproportionately from international markets.  International sales currently make up 35% of VF Corp total.

I expect VF Corp to generate earnings-per-share growth of 8% to 13% a year from the following sources:

  • Margin improvements of 1% to 3% a year
  • Share repurchases of 1% to 2% a year
  • Sales growth of 6% to 8% a year

In addition, VF Corp also has a dividend yield of 2.3% for expected total returns of 10.3% to 15.3% a year over the next several years.

Recession Performance

The clothing industry is subject to steep declines during recessions.  VF Corp is less susceptible than the industry as a whole to recessions, however.

Earnings-per-share for VF Corp over the Great Recession – and subsequent recovery – are shown below:

  • 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 fell by just 7.2% during the worst of the Great Recession in 2009.  VF Corp recovered quickly.  Earnings-per-share hit new record highs in 2010.

Valuation & Ranking

VF Corp is currently trading for a price-to-earnings ratio of 21.3 using adjusted earnings.  Despite its long history of success and above-average expected growth, VF Corp is cheaper than the S&P 500 based on its current price-to-earnings ratio of 25.1.

Additionally, VF Corp has a slightly higher dividend yield than the S&P 500:

  • F. Corporation’s dividend yield is 2.3%
  • The S&P 500’s dividend yield is 2.1%

Over the last decade, VF Corp has traded for an average price-to-earnings ratio of 15.7.  Based on this, VF Corp is overvalued.

On the other hand, the company is trading below the S&P 500’s price-to-earnings ratio despite being of a higher overall quality.  If interest rates remain low and the S&P 500’s price-to-earnings ratio remains elevated, VF Corp appears to be trading at reasonable valuations.

In short, VF Corp is attractively valued on a relative, but not absolute/historical basis.

The company’s long dividend history, reasonable valuation, and strong expected growth rate give the company an above-average rank using The 8 Rules of Dividend Investing.  The company’s rankings are shown below.

Consecutive Years of Dividend Increases:  VF Corp has paid increasing dividends for 43 consecutive years.  The company is a Dividend Aristocrat.  There are currently 186 businesses in the Sure Dividend database with 25+ years of dividend payments without a reduction.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 3.2 percentage points per year.

Source: S&P Factsheet

Dividend Yield:  VF Corp has a dividend yield of 2.3%.  This gives it a rank of 101 (1 being the best) out of 186 for dividend yield.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 2.2 percentage points per year from 1928 to 2013.

Source: Dividends: A Review of Historical Returns

Payout Ratio:  VF Corp has a payout ratio of 49%.  This gives it a payout ratio rank of 88 out of 186.  The lower the payout ratio, the better as this gives more room for future dividend increases and more dividend safety in the event earnings fall.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.

Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate:  Based on the analysis above, VF Corp has an expected earnings-per-share growth rate of 11.5% a year.  This gives the company a rank of 19 out of 186 in the Sure Dividend database.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends from 1972 through 2015.

Source: An Economic Perspective on Dividends

Long-Term Volatility:  VF Corp’s annualized stock price standard deviation (using 10 years of data) is 29.0%.  The lower the stock price standard deviation, the better; this gives investors a ‘smoother ride’ when holding the stock.  VF Corp has a fairly high standard deviation; it ranks 104th out of 86 on this metric.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.

Source: Low & Slow Could Win the Race

Final Thoughts

VF Corp is the industry leader in apparel.  The company has a strong and durable competitive advantage thanks to its size, diversification amongst brands, and strong billion dollar brands.

VF Corp will likely continue to grow investor wealth into the future through dividend and earnigns-per-share increases.

The company has proven that it can generate profits even during severe economic periods like the Great Recession.  The company’s reasonable payout ratio makes future dividend growth very likely.

VF Corp ranks well using The 8 Rules of Dividend Investing.  It is currently ranked 35th out of 186 businesses with 25+ years of dividend payments without a reduction.

VF Corp is an excellent long-term holding.  The company appears to be a bit overvalued on a historical basis, but is a good buy relative to most competition investments in today’s low-interest rate environment (which could be here to stay).

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