The markets are back to this year’s lows, although they have bounced back during last week. Many stocks are still trading at or near their 52-week lows. When the market is down, I like to find support levels and create price alerts at those support levels for all the companies that I am interested in buying. One example, is V.F. Corporation (VFC), which is an undervalued Dividend Aristocrat.
V.F. Corporation (VFC) is one company that has my interest because it hit a critical support level at $45. The chart below shows that it bounced higher when the stock hit the $45 price point. I am very interested in buying shares at this price. The stock is now above the $45 price point with a share price of about $50 per share. However, VFC is still undervalued at current levels, and the dividend yield is just about 4%, and attractive mix. We will discuss more details about the company and the amount of undervaluation.
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Overview of VF Corp
The VF Corporation is an American global apparel and footwear company founded in 1899 and now headquartered in Denver, Colorado. The company was formerly known as Vanity Fair mills until 1969. The company’s 13 brands are organized into three categories: Outdoor, Active, and Work. The primary brands are North Face, Timberland, Smartwool, Icebreaker, Altra, Vans, Supreme, Kipling, Napapijri, Eastpak, JanSport, and Dickies. In addition, the company controls 55% of the U.S. backpack market with the JanSport, Eastpak, Timberland, and North Face brands.
VFC’s stock price was down 44.5% since its high in April 2021. The main driver of the stock price decrease is that the company is struggling with product shortages, high shipping costs, a stronger dollar, and COVID-19 virus-related disruptions in China. Still, VFC appears to be doing a reasonable job of alleviating these challenges.
The current stock price of $50.18 (as of this writing) is right at the lower end of the 52-week range, between $44.18 and $84.96 per share. Thus, VFC looks like a stock that seems to be in the right place to buy up shares where both the 52-week range and support line meet.
VFC Dividend History, Growth, and Yield
We will now look at VFC’s dividend history, growth, and yield. Next, we will then determine if it’s still a good buy at current prices.
VFC is a Dividend Aristocrat and considered a Dividend Champion, a company that has increased its dividend for more than twenty-five years. In this case, VFC has increased its dividend for 49 consecutive years. VFC’s most recent dividend increase was 2%, announced in October 2021.
Additionally, according to Portfolio Insight*, VFC has a five-year dividend growth rate of about 5.2%, which is an excellent rate considering how fast inflation increased last year. The 10-year dividend growth rate is higher at roughly 11.7%.
Something essential to note is that VFC continued to pay its dividend during the most challenging period in the last 100 years. Many businesses and industries were cutting or suspending their dividend payments during the COVID-19 pandemic. However, VFC continued to pay out its dividend and increased them. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.
The company has an excellent dividend yield of approximately 4.0%, more than double the average dividend yield of the S&P 500 Index. Additionally, the dividend yield is highest since the worst months of the pandemic.
This dividend yield is a respectable initial yield for income-driven investors. This dividend yield is also suitable for investors leaving the bond market looking for higher yields. Although, it may not be an excellent stock for income-driven investors who may want a 4.5%+ dividend yield. However, with the company’s increasing dividend rate, I can see over 5% yield on cost (YOC) in the next 5 to 7 years.
VFC’s current dividend yield is higher than its own 5-year average dividend yield of about 2.57%. I like to look at this metric because it gives me a good idea if a company I am researching is undervalued or overvalued based on the current and 5-year average yield. Stock price and dividend yield are inversely related. If the stock price goes higher, the dividend yield decreases and vice versa.
Let’s determine if the current dividend is safe? This metric is critical to look at as a dividend growth investor. Sometimes, undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.
To determine if the dividend payments are safe every year, we must look at two critical metrics. The first one is earning per share (EPS), and then we must look into free cash flow (FCF) per share or operating cash flow (OCF).
Analysts predict that VFC will earn an EPS of about $3.36 per share for the fiscal year (FY) 2023. Analysts are 54% accurate when predicting VFC’s future EPS. In addition, the company is expected to pay out $2.00 per share in dividends for the entire year. These numbers give a payout ratio of approximately 59.5% based on EPS, a conservative value, and it leaves the company with room to continue to grow its dividend and attain Dividend King status.
Having a 60% or lower dividend coverage with a dividend yield of nearly 4.0% gets me very excited. This point will allow the company to continue to grow its dividend at a mid-single-digit rate or a high single-digit rate, as it has been doing for the past ten years, without sacrificing dividend safety. In addition, VFC has a dividend payout ratio of 79% on an FCF basis. Thus, the dividend is well covered in both EPS and FCF.
VFC Revenue and Earnings Growth / Balance Sheet Strength
We will now look at how well VFC performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.
VFC revenues have been growing modestly at a compound annual growth rate (CAGR) of about 0.5% for the past nine years. Net income, however, did much better with a CAGR of ~1.8% over the same nine-year period.
However, according to Portfolio Insight*, EPS has grown 5.1% annually for the past nine years and at a CAGR of 3.4% over the past five years. Furthermore, EPS has significantly increased from FY2021 to FY2022, increasing nearly 143%. This increase was due to the low EPS that the company made during the COVID-19 year of 2020.
Since revenue, net income, and EPS did have low growth over the years, this stock is attractive based on its valuation and dividend yield. We will talk about the company’s valuation later in this article. In the meantime, analysts predict that the company will grow EPS at an 8% rate over the next five years.
Last year’s EPS increased from $1.31 per share in FY2021 to $3.18 per share for FY2022, a significant increase of 143% considering the challenging two years because of the COVID-19 pandemic. This performance was an excellent growth year over year. Additionally, analysts expect VFC to make an EPS of $3.36 per share for the fiscal year 2023, which would be a ~6% increase compared to FY2022. I like to see that future earnings continue to grow.
The company has a solid balance sheet. VFC has an S&P Global credit rating of A-, an upper medium investment-grade rating. Also, the company has a debt-to-equity ratio of 1.X9, which is a high ratio and concerning. However, the company has a solid balance sheet to overcome significant economic downturns like the COVID-19 pandemic last two years, adding to the dividend safety. The leverage ratio is 2.2X and interest coverage is more than 12X.
VFC Competitive Advantage and Risks
VFC’s competitive advantage comes from its size and history of doing business. As a result, the company can optimize and scale much faster than most competitors. In addition, the company has intangible competitive advantages with its brands. The three most prominent brands are Vans, The North Face, and Timberland.
However, that is still a risk with an investment in VFC. For example, if there is a recession, the stock price may decrease like during the Great Recession and the COVID-19 pandemic, which saw significant stock price declines. Also, weakness in consumer spending because of higher inflation will hurt VFC’s top line.
One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Lastly, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business is ultimately equal to the sum of the future cash flow that that business can provide.
Let’s first look at the P/E ratio. VFC has a P/E ratio of ~15.6X based on FY 2023 EPS of $3.36 per share. The P/E multiple is excellent compared to the past 5-year PE average of 18X. If VFC were to revert back to a P/E of 18X, we would obtain a price of $60.48 per share.
Now let’s look at the dividend yield. As I mentioned, the dividend yield currently is about 4.0%. There is good upside potential as VFC’s own 5-year dividend yield average is ~2.5%. For example, if VFC were to return to its dividend yield 5-year average, the price target would be $80.00.
The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 5%. I use a 10% discount rate because of the higher-than-normal current dividend yield. In addition, the projected dividend growth rate is conservative and lower than its past 5-year average. These assumptions give us a fair price target of approximately $42.00 per share.
If we average the three fair price targets of $60.48, $80.00, and $42.00, we obtain a reasonable, fair price of $60.83 per share, giving VFC a possible upside of 21.7% from the current $50.00 share price. VFC is clearly an undervalued Dividend Aristocrat.
Conclusion on VF Corporation (VFC): Undervalued Dividend Aristocrat
VFC is a high-quality company and undervalued Dividend Aristocrat that should meet most investors’ requirements. The company has a market-beating 4.0% yield and a long-term dividend growth history. As discussed above, the company is experiencing some issues, but VF Corp is a world-class corporation on sale with a 21.7% upside from the current price. Thus, I have a buy recommendation for it.
Thanks for reading VF Corporation (VFC): Undervalued Dividend Aristocrat.
You can also read Whirlpool (WHR): Undervalued and 4% Yield by the same author.
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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for SeekingAlpha.com as well as SureDividend.com. I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.