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Dividend Aristocrats in Focus Part 4: V.F. Corporation

Part 4 of the Dividend Aristocrats in focus series covers V.F. Corporation (VFC).  V.F. Corporation is the largest publicly traded apparel company, with a market cap of $29 billion.  The company is nearly twice the size of its next two largest competitors combined, Michael Kors (KORS) and Ralph Lauren (RL).  V.F. Corporation  has increased its dividend payments for 41 consecutive years.

The company’s multi-decade run of success in the apparel industry shows it has a competitive advantage.  Fashion and apparel is traditionally a very difficult industry in which to find long term success.  Trends in fashion change quickly than most industries.  We drink the same sodas and eat the same snacks as we did 30 years ago, but clothing styles have changed quite a bit since the 1980’s.  V.F. Corporation has managed to grow in the highly competitive apparel business through building or acquiring recognizable clothing lifestyle brands like 7 For All Mankind, Lee, Nautica, Vans, Wrangler, and The North Face.

Competitive Advantage in Branding

V.F. Corporation has a long list of easily recognizable brands.  The company’s competitive advantage and success has been driven by brands that consumers prefer.  The company changes the individual style of each brand from year to year to keep up with current fashion trends, but the underlying message of what each brand represents stays the same.

Source:  V.F. Corporation Investor Relations

The longevity of the company’s brands show how well managed its brands are.  The list below shows some of the company’s older and larger brands:

The typical clothing brand does not last decades.  Fashion is an extremely quick changing industry where change is often embraced simply for change’s sake.  This makes V.F. Corporation’s stable of long-lasting brands all the more impressive.  Each of the 5 brands listed above generate over $1 billion a year in revenue.

Growth Potential

V.F. Corporation’s management has been very transparent with the company’s growth plans.  The company’s goal is to achieve over $17 billion in revenue by 2017.  This requires that V.F. Corporation maintain a 10% revenue growth rate.  The company’s management is aiming for 8% organic growth and 2% growth from acquisitions to create the 10% per year growth.  By 2017, the company also plans to have increased both operating and gross margin, and boost earnings per share to $4.50 and dividends per share to $1.80.  Currently, V.F. Corporation pays a dividend of $1.05 and has earnings per share of $2.80.  The company is expecting very strong growth over the next 3 years.
V.F. Corporation will achieve this growth through its rapidly growing international sales.  From 2008 to 2013 sales in the company’s Americas segment (excluding U.S.) grew 10% a year, sales in Europe grew 9% a year, and sales in the Asia Pacific region grew an exceptional 34% a year.  The company’s international operations currently account for 38% of sales.  This number is expected to rise to 43% by 2017.
The North Face is the number one outdoor apparel brand.  Despite its leading position, it still accounts for less than 10% of the $25 billion global outdoor apparel market.  Vans and Timberland also control less than 10% market share in their respective apparel categories.  Despite excellent branding and strong positions, V.F. Corporations top brands still have long growth runways ahead, especially internationally.

The North Face in particular has exciting growth prospects in the Asia Pacific region.  The brand is expected to grow revenue by 26% a year in the region through 2017.  As more people in the Asia Pacific region rise out of poverty and join the middle-class, they will have more disposable income for lifestyle brands.  The North Face is working hard to build outdoor awareness and develop an outdoor community in several Asian markets.  The brand has positioned itself as the brand for aspiring outdoor adventurers.  Over the next several years, V.F. Corporation will very likely continue expanding its store count and distribution capabilities throughout the Asia Pacific region to quickly grow the North Face brand (among others) where growth potential is at its highest compared to the rest of the world.

Fair Value

If V.F. Corporation hits its dividend target of $1.80 by 2017, investors who purchase the stock today will see a 2.7% yield on cost by 2017.  Income oriented investors can realize significantly higher yields today than V.F. Corporation will have in 3 years from Dividend Aristocrats like McDonald’s (MCD) which has a 3.5% dividend yield, or Coca-Cola (KO) which has a 2.9% dividend yield.

V.F. Corporations is trading far above its historical P/E ratio.  The company has traded at an average  P/E ratio below 15 for 7 of the last 10 years.  The company’s current P/E ratio is hovering around 24, and its forward P/E ratio is about 19.  V.F. Corporation appears to already have its growth through 2017 baked into the stock price when you consider its historical P/E ratio.  For the company to maintain its current P/E ratio, everything has to go right.  If V.F. Corporation misses a few earning estimates or growth slows, the company’s P/E ratio will likely tumble.

Final Thoughts

V.F. Corporation is an industry leader in apparel.  The company has a long history of rewarding shareholders through increasing dividends.  Further, V.F. Corporation is built on high quality brands that relate to consumer’s identity.  The company has achieved strong growth in recent years and will likely continue to grow revenue per share around 10% a year.  Despite this, V.F. Corporation appears overvalued at this time.  The company is a hold, and will be a buy when its P/E ratio falls into more reasonable territory.  Due to the company’s high valuation, I believe there are better Dividend Aristocrat investment opportunities available.

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