V.F. Corporation (VFC): Does Dividend Growth Justify The Valuation? Sure Dividend

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V.F. Corporation (VFC): Does Dividend Growth Justify The Valuation?


Updated on January 22nd, 2019 by Nate Parsh

Investors looking for high-quality dividend growth stocks would be wise to peruse the list of Dividend Aristocrats. These are companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.

 

V.F. Corp (VFC) is on the list of Dividend Aristocrats, and has increased its dividend for 46 years in a row.

Not only has V.F. Corp increased its dividend for more than four decades, but it typically raises its dividend at high rates. For example, the 2018 dividend raise was 10.9%. This followed 2017’s raise of 9.5%.

While we like the company’s business model and dividend growth track record, we feel that the 17% gain in V.F. Corp shares since the beginning of the year has caused the stock to become expensive on a valuation basis. That said, investors should be encouraged by recent results and be ready to add shares on a pullback.

Business Overview

V.F. Corp is a giant in the apparel industry. Its annual sales exceed $12 billion, but the company has humble beginnings. It started all the way back in 1899, and has seen many twists and turns in the nearly 120 years since.

The company was first started by John Barbey and a group of investors. Together, they created the Reading Glove and Mitten Manufacturing Company.

During the 1960’s, the company adopted its current name, V.F. Corp. It has a highly diverse product portfolio, with many category-leading brands.

The current environment is challenging for V.F. Corp, due to a difficult retail climate. Mall traffic is declining, which has hurt brick-and-mortar retailers, many of which carry V.F. Corp’s products.

Despite the company’s early struggles in this environment, V.F. Corp has seen earnings and revenue growth over the last year. The company recently reported third quarter financial results. The company’s earnings-per-share of $1.30 was a nearly 30% improvement from the prior year.

VFC Overview

Source: Earnings Presentation

Results were also $0.20 above what analysts had been expecting. Revenue grew 8% to $3.94 billion, $70 million above estimates.

While the company struggled with earnings-per-share and revenue growth in both 2016 and 2017, V.F. Corp seems to have turned the corner over the past year or so. The company has topped estimates for both earnings-per-share and revenue growth over the past four quarters.

Growth Prospects

V.F. Corp has four avenues for future growth, which include acquisitions, divestitures, focus on core brands and growth through e-commerce.

The company completed its $820 million purchase of Williamson-Dickie Manufacturing Co on October 2nd, 2017. V.F Corp’s work segment, which includes Dickies, was higher by 5% during the most recent quarter. Growth for the work segment was largely due to international strength and an increase in direct-to-consumer sales. Dickies is one of six billion-dollar brands for the company.

The acquisition should continue to boost growth for the next several years.

Second, V.F. Corporation has announced that it is spinning off its Wrangler, Lee and outlet businesses into a separate company called Kontoor Brands, Inc. Jeans has been a very tough business for V.F. Corp. Sales for Wrangler brands were down 2% in the most recent quarter while Lee brands were down 9%. Removing these under performing brands will allow V.F. Corp to focus on its core brands.

V.F. Corp expects continued growth across all channels in 2019.

VFC Channels

Source: Earnings Presentation

And the company’s core brands are performing very well. Vans brands experienced a 25% increase in sales during the most recent quarter. This is the second consecutive quarter of at least 25% growth. Revenues for The North Face brand were higher by 14%, with 16% growth in the U.S. and 23% growth in Asia.

V.F. Corp is also posting compelling growth rates for direct-to-consumer (up 10%) and digital sales (up 24%). These growth rates are very similar to what the company has seen in recent quarters. It took the company some time to adjust to changing behaviors in consumer spending, but V.F. Corp appears to have figured out how to reach today’s customers.

Competitive Advantages & Recession Performance

There are a few key competitive advantages that have fueled V.F. Corp’s impressive growth for so many years. First, are its strong brands. The company has several billion-dollar brands that lead their respective categories. This gives the company pricing power.

In addition, V.F. Corp benefits from operating in a steady industry. Many of the products V.F. Corp sells—such as workwear-have not changed much, if at all, in the past 100 years.

These qualities help V.F. Corp remain profitable, even during recessions. For example, V.F. Corp kept on raising its dividend through the Great Recession, thanks to its consistent profitability.

The company’s earnings during the Great Recession are below:

V.F. Corp experienced a mild earnings decline in 2009, but returned to strong growth in 2010 and beyond. The company has increased earnings-per-share at a rate of 8.3% over the past ten years.

Valuation & Expected Returns

After third quarter results, V.F. Corp updated its guidance. The company now expects to earn $3.73 per share, up from $3.65 previously. If achieved, this would be a 21% improvement from the prior year.

Trading near a price of $82, this gives the stock a price-to-earnings ratio of 22. We have a 2023 target valuation of 18x earnings. If shares were to revert to our target average, then annual returns would be reduced by 3.9% through 2023.

Shares of V.F. Corp have a current dividend yield of 2.5%. Given the $1.89 in dividends paid to shareholders in 2018 and the company’s earnings-per-share guidance for $3.73, the payout ratio is 50.7%. The company’s dividend is very safe, which is a topic we explore in the following video:

We expect a total annual return of 6.9% through 2024. This is a fairly low rate of return, because of the high valuation of the stock. From a growth and dividend perspective, V.F. Corp. is a great stock. It is simply overvalued at the present time.

Final Thoughts

V.F. Corp has overcome some of the short-term challenges that it faced due to the decline of shopping malls. The company has acquired assets that fit in well with its business and is spinning off those that don’t.

The company has also seen impressive growth rates in its core brands, like Vans and The North Face, as well as in the areas of e-commerce. This has V.F. Corp in a strong position for the future.

That being said, our projected total annual return of 6.9% is just not enough for us to recommend buying shares of V.F. Corp at the moment. If shares were to pullback, we would strongly recommend that investors consider adding the apparel maker to their portfolio.

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