This Dividend Aristocrat Gets No Respect

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If Peter Lynch could describe the perfect stock, somehow I think one of the companies he would mention is V.F. Corp. (NYSE: VFC). The company operates a relatively boring business by producing clothing that is sold at thousands of retailers worldwide. However, what sets V.F. apart is their name brands are well-established, and recently the company increased its dividend for the 40th consecutive year. This relatively pedestrian business hides an exciting combination of growth and income. The company's recent earnings were nothing short of impressive, and guidance for the future should give investors comfort that great things are yet to come.

Earnings Growth Driven By The Company's Top 3 Brands:

In the most recent quarter, V.F. reported revenue up 14%, and adjusted EPS increased 23%. They operate five different divisions domestically, and international sales are reported separately. The company's Outdoor & Action Sports division showed organic growth of 6%, or 11% in constant currency. The North Face brand showed consistent growth with revenue up 5%, again which was negatively affected by foreign currency exchange. Vans revenue increased an extremely impressive 21%, and would have shown 26% growth in constant currency. With strong performances from two existing brands, and very strong revenue growth at the acquired Timberland brand, this division should continue to show strong gains.

Results Could Be Improved By Better Growth Elsewhere:

While the company's top three brands are certainly popular enough to create good earnings growth, V.F. could improve results even further if its other divisions can play catch-up. The company's Jeanswear division showed revenue up 1% in constant dollars, and margin improved based on lower input costs. This is similar to what happened at the company's Imagewear and Sportswear units, which both showed low single-digit revenue increases. The brightest spot of V.F.'s other divisions was The Contemporary Brands unit. This division still suffers from a confusing comparison since the company sold its John Varvatos line within the last twelve months. Excluding this brand, operating income increased 66% and operating margin was up 6.5%.

International Growth Is Impressive:

V.F. Corp's future growth is likely to come from increased international sales. Overseas revenues increased 28%, and even without the additional contribution from Timberland, revenues would have still increased 8%. The company saw strong gains from its Vans, The North Face, and Lee divisions across multiple countries. Given the fact that so many companies have suffered from the difficult international economy, this is especially impressive and shows that V.F.'s brands are popular worldwide.

Financials & Outlook:

As proof that V.F. isn't just about trying to expand sales at any cost, the company's gross margin improved 1.4% to 46.7% in the current quarter. Just for comparison sake, competitors like The Gap (NYSE: GPS), Deckers Outdoor (NASDAQ: DECK), and Wolverine Worldwide (NYSE: WWW) can't match these results. The Gap competes directly with V.F.'s multiple clothing lines, yet showed a gross margin of under 40%. Deckers Outdoor competes with V.F.'s Timberland line, and showed a gross margin that declined significantly from around 49% last year to just over 42% this year. Wolverine is a strong competitor to Timberland as well, yet their gross margin is under 40%. As you can see, V.F. not only shows increased sales, but is improving their cost structure and pricing as well. The company also is making sure that these improved results flow to the bottom line and improve cash flow. The company grew operating cash flow by over 19% on a year-over-year basis. In addition, V.F. improved its balance sheet by paying down almost 22% of its long-term debt since the beginning of 2012. What is equally impressive is the company's outlook for the full year.

V.F. expects top line growth of 15% and raised its full-year EPS guidance from $9.50 to $9.60. Equally impressive was the company's dividend increase of 21%, which was the 40th consecutive year of higher dividend payments. Given that V.F. expects significant growth this year, it's possible analysts are underestimating the company's prospects going forward.

V.F. is expected to grow earnings by about 11.5% over the next few years. The company's competition of The Gap, Deckers, and Wolverine, are expected to grow between 7.5% and 10% during the same timeframe. What I believe sets V.F. apart, is the company's long history of dividend growth. Though the company is expected to grow faster than its peers, the stock currently sells for a P/E ratio similar to both The Gap and Wolverine. Only Deckers sells for a lower forward P/E ratio, yet that company seems headed in the opposite direction of the rest. Deckers' revenue and EPS recently decreased, and huge inventory problems will likely plague the company for the next several quarters. V.F. offers a combination of growth, a 2% yield, and 40 straight year of dividend increases. Smart investors should consider adding VFC to their personalized Watchlist today.

MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Gap. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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