Dividend Aristocrats In Focus: V.F. Corporation Sure Dividend

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Dividend Aristocrats In Focus: V.F. Corporation


Updated on February 23rd, 2021 by Bob Ciura

Investors looking for high-quality dividend growth stocks would be wise to examine the list of Dividend Aristocrats. These are companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. There are just 65 such companies on this list.

The Dividend Aristocrats are among the highest-quality dividend stocks in the entire stock market. For that reason, we have compiled a list of all 65 Dividend Aristocrats, along with important metrics like dividend yields and price-to-earnings ratios.

You can download a free copy of the Dividend Aristocrats by clicking on the link below:

 

V.F. Corporation (VFC) is on the list of Dividend Aristocrats, and has increased its dividend for 48 years in a row. V.F. Corp increases its dividend each year, including 2020 which was a very difficult year for the company, and the broader economy, due to the coronavirus pandemic.

But V.F. Corp has a recession-resistant business, and the ability to remain highly profitable even during economic downturns. This gives it the ability to continue raising its dividend each year, even when business conditions deteriorate.

Business Overview

V.F. Corp is a giant in the apparel industry. The company’s annual sales exceed $10 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.

In 2019 V.F. Corp separated its VF’s Jeanswear organization, including the Wrangler, Lee and Rock & Republic brands. The separation was completed via a 100% distribution of shares to V.F. Corp shareholders, with the new entity named Kontoor Brands trading as an independent, publicly traded company under the ticker KTB.

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. If that weren’t bad enough, the coronavirus pandemic of 2020 sent the U.S. economy into a recession, which is a broadly negative catalyst for apparel.

These trends have weighed on V.F. Corp in recent periods. In the most recent quarter, revenue came in at $3.0 billion, a -6% decline, driven by store closures and lower consumer demand as a result of the COVID-19 pandemic.

Source: Investor Presentation

Operating income equaled $412 million compared to $540 million previously, while adjusted earnings-per-share equaled $0.93 versus $1.15 prior. V.F. Corp also updated its fiscal 2021 guidance, anticipating adjusted earnings-per-share of approximately $1.30, up from “at least $1.20” from previous guidance.

V.F. Corp had a tough year in 2020, but it remains an industry leader with top brands. Assuming the global economy continues to recover in 2021, V.F. Corp should return to growth.

Growth Prospects

V.F. Corp has multiple avenues for future growth, which include acquisitions, a renewed focus on core brands, and growth through e-commerce. First, the company completed its $820 million purchase of Williamson-Dickie Manufacturing Co in 2017. Work apparel is one of V.F. Corp’s strongest performing businesses right now, thanks to Dickies. In fact, Dickies was the only 1 of the company’s big four brands to post positive currency-neutral sales growth in the most recent quarter.

Second, V.F. Corporation completed its announced spinoff of its Wrangler, Lee and outlet businesses into a separate company called Kontoor Brands, Inc. (KTB) in 2019. Jeans had been a very tough business for V.F. Corp. Removing these under-performing brands allowed V.F. Corp to focus on its core brands.

Lastly, direct-to-consumer sales are an emerging catalyst for V.F. Corp, especially since the coronavirus pandemic only accelerated the trend toward online shopping. Direct-to-consumer digital channel sales increased 49% last quarter.

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 customers in an era of Internet retail.

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 experienced a decline last year due to the pandemic, but it remained highly profitable which allowed it to raise its dividend.

Given its divestitures of weaker businesses, strong core brands and growth in digital channels, we feel that V.F. Corp should be able to maintain this growth rate going forward.

Valuation & Expected Returns

After second quarter results, V.F. Corp reaffirmed its guidance for the fiscal year. The company expects to earn $1.30 per share in fiscal 2021, which would be a significant year-over-year decline of 51%. However, for valuation purposes we are using $2.40 in underlying earnings power and a 10% annual growth rate off this reduced base.

Trading near a price of ~$80, the expected EPS of $2.40 gives the stock a price-to-earnings ratio of 33.3. We have a target P/E multiple of 19. If shares were to revert to our target average, then annual returns would be reduced by 10.6% over this period of time.

Shares of V.F. Corp have a current dividend yield of 2.5%. Given the new annualized dividend of $1.96, the payout ratio is 82% using our base estimate of $2.40 in EPS. The company’s current payout ratio is elevated against its historical average, but the dividend payout remains safe barring another large decline in EPS in the upcoming fiscal year.

Putting it all together, a projection of expected five-year total shareholder returns is below:

We expect a total annual return of 1.9% through 2026. This projection is a low rate of return, primarily because of the high valuation of the stock. From a dividend growth 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 and the coronavirus pandemic. The company has acquired assets that fit in well with its future plans, and divested those that do not.

The company has also seen impressive growth rates in its core brands, particularly Dickies, 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 1.9% is not attractive enough for us to recommend buying shares of V.F. Corp at the moment.

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