Published by Bob Ciura on October 17th, 2017
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.
There are many Dividend Aristocrats that could be of great assistance to a portfolio built around dividend growth.
V.F. Corp (VFC) is on the list of Dividend Aristocrats, and has increased its dividend for 44 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 2016 dividend raise was a very healthy 13.6%.
This article will discuss V.F. Corp’s business model, and why it is an attractive dividend growth stock.
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.
Source: 17×17 Investor Presentation, page 6
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.
As a result, 2016 was a disappointing year. Total revenue was flat, from the previous year. Earnings-per-share declined 8%, to $2.78. The decline was due mostly to the strong U.S. dollar, and restructuring costs.
However, excluding non-recurring expenses, adjusted earnings-per-share increased 7% for the fiscal year. Unfortunately, 2017 has not been much better than 2016, so far. Over the first two fiscal quarters, revenue was flat again.
However, this should be only a short-term slowdown. There is plenty of room for future growth.
Growth Prospects
V.F. Corp still has three avenues for future growth, which include acquisitions, new geographic markets, and growth through e-commerce.
First, V.F. Corp can use acquisitions to supplement its organic growth. On August 14th, it announced the acquisition of Williamson-Dickie Manufacturing Co.
Williamson-Dickie has a number of strong brands, including Dickies, among others. With the acquisition completed, Dickies is now V.F. Corp’s 6th billion-dollar brand.
Source: Acquisition Presentation, page 10
The acquisition should boost growth, for the next several years. After the acquisition, V.F. Corp updated its growth expectations. Earnings-per-share are expected to reach $5.00 by 2021, compared with $2.96 expected for fiscal 2017.
Second, while V.F. Corp’s U.S. business is struggling, it is still growing in the international markets.
For example, in fiscal 2016, organic revenue increased 7% in Europe, and 14% in China. In the Americas excluding the U.S., revenue increased 11%.
These new regions, particularly the emerging markets, are a long-term growth catalyst. These markets have large populations, and high rates of economic growth.
Williamson-Dickie will help out in this regard. Approximately one-third of its sales come from outside the U.S.
Source: Acquisition Presentation, page 11
It will also be a valuable addition to V.F. Corp’s direct-to-consumer business, which is another catalyst for future growth.
Lastly, even though physical retailers are in trouble, e-commerce is not a threat to V.F. Corp.
Direct-to-consumer revenue increased 9% in 2016, driven by a double-digit increase in Outdoor & Action Sports products.
Direct-to-consumer revenue increased 14% last quarter, with digital revenue up 36%. Full-year direct-to-consumer revenue is expected to rise 11%.
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, denim jeans, and more—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:
2007 earnings-per-share of $1.35 2008 earnings-per-share of $1.39 (3% increase) 2009 earnings-per-share of $1.29 (7% decline) 2010 earnings-per-share of $1.61 (25% increase)V.F. Corp experienced a mild earnings decline in 2009, but returned to strong growth in 2010 and beyond.
Valuation & Expected Returns
In 2016, V.F. Corp reported adjusted earnings-per-share of $3.11. Based on adjusted earnings, the stock has a price-to-earnings ratio of 20.6. This compares to the S&P 500 Index price-to-earnings ratio of 25.5.
The stock trades at a 19% discount to the S&P 500 Index. The stock seems to be slightly undervalued, given its strong earnings growth potential.
Even if the price-to-earnings ratio does not expand above 21, the future return potential still seems promising. After the recent acquisition, V.F. Corp expects revenue to increase by 5%-7% each year through 2021.
Management also expects margin expansion and share repurchases to fuel 10%+ earnings growth each year.
Source: Acquisition Presentation, page 19
Along with dividend growth, total returns could reach well into the double-digits if everything goes as the company’s management expects:
4%-6% organic revenue growth 1% revenue growth from acquisitions 2% margin expansion 3% share repurchases 3% dividend yieldUnder this scenario, total returns would reach 13%-15% per year, plus or minus any changes in the price-to-earnings ratio.
VF Corp’s dividend is highly secure. The company has a current payout of $1.68 per share. This represents a payout ratio of 54%, based on 2016 earnings-per-share.
Final Thoughts
V.F. Corp is struggling through some short-term challenges, primarily the deterioration of U.S. shopping malls. Revenue growth in the U.S. has slowed as a result.
However, this could prove to be a buying opportunity, as the company has multiple growth catalysts to look forward to. Acquisitions, international markets, and direct-to-consumer sales should continue to generate growth.
V.F. Corp is not significantly undervalued, but it is still a high-quality Dividend Aristocrat