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VF Corp: Dividend Aristocrat On The Rebound

Published February 23rd, 2017 by Bob Ciura

Apparel giant VF Corporation (VFC) is on the rebound.

Two years ago, VF Corp was trading near $77 per share. But it has fallen steadily since. It finally bottomed out at $49.56 on February 3.

The stock has gained some ground back. Investor hopes were buoyed by the company’s solid fourth-quarter earnings report.

VF Corp’s strong brands, steady earnings growth, and 3% dividend yield help it score very well using The 8 Rules of Dividend Investing.

VF Corp is a great dividend growth company. It has raised its dividend for 44 years in a row.

This makes it a Dividend Aristocrat, a group of companies in the S&P 500 Index with 25+ consecutive years of dividend increases.

You can see the entire list of all 51 Dividend Aristocrats here.

The good news is that the stock now has a cheap valuation, and the declining share price has pushed the dividend yield up to 3.2%.

If VF Corp’s rough period is finally over, the stock could be an attractive value opportunity.

Business Overview

Rising costs of labor overseas and the strong U.S. dollar put a dent into the apparel industry in 2016.

Considering it is operating in a tough climate, VF Corp posted good financial results for the fourth quarter. Adjusted earnings-per-share increased 3% year over year, and met analyst expectations.

Excluding the impact of the strong U.S. dollar, adjusted earnings-per-share rose 8%.

VF Corp’s long history of dividend growth is due in large part to a strong brand portfolio. The company has a large and diverse listing of brands, across the apparel industry.

VFC Brands

Source: 17×17 Investor Presentation, page 6

VF Corp has five individual brands that generate more than $1 billion in annual sales:

Vans is now VF Corp’s biggest brand, which comes at a great time, due to the emerging health and wellness trend. Consumers are becoming more active, and the Vans franchise allows VF Corp to capitalize.

Thanks to its popular brands, 2016 was another year of consistent growth. Earnings-per-share, as adjusted, rose 7% excluding currency.

The international markets performed better than the U.S. last year. Constant-currency revenue increased 7% in Europe, and 8% in Asia-Pacific, including 14% growth in China.

These markets will continue to be growth catalyst for VF Corp in 2017.

Growth Prospects

Despite the short-term pressures facing the company, VF Corp can continue to grow earnings moving forward.

It plans to grow revenue from new product development, and further expansion in new markets.

VFC Revenue

Source: 17×17 Investor Presentation, page 17

VF Corp is focusing future investment on its Outdoor & Action brands, to meet the demands of a more active consumer base.

The company expects two-thirds of its total revenue will come from the Outdoor & Action segment by the end of 2017.

VFC Outdoor

Source: Timberland 2019 Presentation, page 4

The Vans, North Face, and Timberland brands—widely considered to be the company’s ‘Big Three’ brands—will be the cornerstone of this initiative.

Outdoor & Action Sports revenue increased 2% in 2016, to $7.5 billion.

Vans is the company’s best-performing brand right now. Last year, sales of Vans products rose 7%. Growth for the Vans brand accelerated throughout the year, reaching 15% in the fourth quarter.

Timberland revenue increased 1% last year, while North Face sales would have increased in the mid-single digits were it not for the strategic decision to reduce sales to the off-price channel.

International markets are an attractive catalyst for the company. International revenue rose 6% last year, including double-digit growth in the non-U.S. Americas and in China.

China is a critical market for the company, thanks to its large population and high rates of economic growth.

The Vans brand is doing especially well there. Vans revenue increased more than 25% in Asia last year. This was fueled by almost 50% growth in direct-to-consumer sales.

VF Corp expects double-digit growth for Vans in 2017, thanks largely to the Asian markets.

In the U.S., the company is seeing excellent growth from new channels, specifically e-commerce. VF Corp’s direct-to-consumer business posted 9% revenue growth in 2016, including more than 20% growth in e-commerce sales.

Moreover, earnings-per-share growth will be fueled by continued margin improvements.

VFC Margin

Source: 17×17 Investor Presentation, page 18

For 2017, VF Corp expects mid-single digit growth in revenue and earnings-per-share, excluding currency effects.

This kind of growth would be more than enough for VF Corp to raise its dividend again in 2017.

Dividend Analysis

Even though VF Corp is stuck in a growth slowdown, there is little danger to its dividend. The company has seen many ups and downs over the past four decades, yet it has consistently raised its dividend throughout.

VFC Dividend

Source: Investor Relations

VF Corp’s dividend more than doubled from 2011-2015. And, it should have no trouble continuing to increase its dividend moving forward.

VF Corp’s current annualized dividend payout is $1.68 per share. This represents a 54% payout ratio based on 2016 earnings-per-share of $3.11.

Assuming 4%-6% growth in 2017, earnings-per-share could rise to approximately $3.23-$3.30. The current annualized dividend would then take up less than half of earnings-per-share.

A payout ratio below 50% leaves plenty of room for the company to raise the dividend again in 2017, with enough room to continue investing in the business.

VF Corp has a strong balance sheet, which makes it easier for the company to devote additional cash toward capital returns.

VF Corp ended 2016 with $1.22 billion in cash and marketable securities on the balance sheet, and a long-term debt-to-equity ratio of 41%.

Final Thoughts

The apparel industry has struggled broadly over the past year, due to a brutal currency environment.

But the best-in-class operators like VF Corp and Nike (NKE) continue to do well. Thanks to their strong brands, they remain highly profitable companies, and pass along hefty dividend increases each year.

VF Corp’s solid fourth-quarter report lays the foundation for a better year in 2017, led by the Outdoor & Action brands, particularly in the emerging markets.

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