V.F. Corporation Dividend – Slowing or Growing?

By Chad Henage - June 22, 2012 | Tickers: GPS, SHLD, VFC | 0 Comments

• Email
• Print

V.F. Corporation (NYSE: VFC) made headlines not long ago by acquiring the footwear brand Timberland. However, this is just one of the many brands that V.F. Corp. owns. It isn't a stretch to say if you've bought a piece of clothing, hat, accessory, handbag, piece of luggage, or many other products that you've probably contributed to V.F. Corp.'s bottom line. One accomplishment that V.F. Corporation also can claim is, the company has increased its dividend for at least the last 25 years in a row. What I want to know is, can the company afford its current dividend, and what type of dividend growth should investors expect going forward?

Before we get to the dividend, we need to know how the market values V.F. Corporation. Since the company primarily competes in the clothing and accessories market, companies like The GAP (NYSE: GPS) and Sears Holdings (NASDAQ: SHLD) are natural competitors. While V.F. Corp. products are sold in Kmart (owned by Sears) the company also produces its own store brand merchandise. The GAP has multiple brands that compete in the apparel industry for consumers dollars. Let's see how these three companies compare to get an idea if there is opportunity in V.F. Corp. based on valuation.

When it comes to comparisons, Sears is at a natural disadvantage to V.F. Corp. and The GAP, since the company is going through such a large restructuring effort. V.F. Corp. has both the higher future growth rate, and the higher yield, compared to The GAP. We've found out that V.F. Corp. seems to be valued fairly, but what about their dividend, is it sustainable?

Looking at the company's free cash flow is the best way I've found to determine if a dividend is sustainable. If the company is constantly paying out more in dividends than their free cash flow, that's usually a red flag. V.F. Corp. scores pretty well on this test. In the last few years, the company's free cash flow payout ratio has been around 30%. Since V.F. Corp. is a well established company, this payout ratio shouldn't vary much on a year to year basis. It seems that the company can easily afford its current payout. If the current dividend is safe, the next question is, how has the company grown its dividend historically?

V.F. Corp. has a strange dividend history. In the last 11 years, the company issued one huge increase, but the remainder of the years have been fairly consistent. You can spot this huge increase in the following chart:

The interesting thing is, if you set aside this one huge increase, in the prior five years, dividend growth was about 4.75%. After this huge increase in 2007, the average increase in the most recent five years is 5.63%. So what should investors expect in the future?

Analysts are expecting just over 13% EPS growth, I think investors should easily expect 13-15% dividend growth going forward. Considering that the company pays out just 30% of their free cash flow, it seems reasonable that this payout percentage could increase slightly without it impacting the company's day to day operations. I would also suggest that future earnings growth could be understated. V.F. Corp. has beaten analyst expectations by an average of 7.5% over the last four quarters. If the company continues to beat expectations, EPS growth could actually end up being more like 14-15%. This is another reason I think the company can easily support 13-15% dividend growth. With the shares selling for less than 15 times earnings, it seems like the stock might be priced attractively. Use this post as a starting point for your research, and see if you should consider adding this dividend aristocrat to your buy list.

• Email
• Print
• Feedback