VF Corporation: Is this dividend king on sale?
Opdateret: for 1 dag siden
This year VF Corporation announced their 50th consecutive yearly dividend raises, making it a dividend king. However, the market hasn't appreciated the performance of the company and the stock has lost more than 60 % of its value in 2022. It means that this dividend king is currently paying a dividend yield of more than 7 %. Does it mean that it is a bargain and should be added to your portfolio? In this analysis I will try to find out.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in VF Corporation. However, I did previously own shares in the company that I sold in the spring 2021. I do own shares in one of the competitors Crocs, which is 3,68 % of my portfolio. If you would like to know what I have in my portfolio, or you want to copy it, you can read how to do so here. Having previously owned shares in the company means that I have previously held the company in high regard. Nonetheless, the analysis will be unbiased as well.
VF Corporation was founded in 1899 in Denver, Colorado. It is one of the world's largest apparel, footwear, and accessories companies in the world. The company operates in three different segments: Outdoor (45 % of revenue), Active (45 % of revenue), and Work (10 % of revenue). The company owns the following 13 brands: The North Face, Timberland, Icebreaker, Smartwool and Altra in the outdoor segment, Vans, Supreme, Eastpak, JanSport, Kipling, and Napapijri in the active segment, and Timberland pro and Dickies in the work segment. Their products are sold through wholesale (54 % of revenue) and direct to consumers (46 % of revenue), either through their own stores or through e-commerce. VF Corporation sell most of their products in the Americas (57 %), followed by Europe (29 %) and Asia-Pacific (14 %). I believe that their well-recognized brands are what give the company a brand moat. Management seems to agree, as they wrote the following in their annual report: "Many of VF's brands have long histories and enjoy strong recognition within their respective consumer segments". It is also worth noting that VF Corporation spun off their jeans and outlet stores in 2018, and this spin off created the company Kontoor Brands that also trades on the stock exchange.
Their interim CEO is Benno Dorer. VF Corporation doesn't have a CEO at the time of writing this analysis as former CEO, Steven E. Rendle decided to retire immediately on December 5, 2022. Previously, Interim CEO Benno Dorer served as the lead independent director at VF Corporation from 2021 to 2022. Besides being the interim CEO of VF Corporation, he also a member of the Board of Directors at Origin Materials. He has previously been the CEO of Clorax and has experience from the Procter & Gamble Company as well. When appointed to be the interim CEO of VF Corporation, it was mentioned that Benno Dorer has an excellent track record of generating strong business results in a global consumer portfolio business. Benno Dorer mentioned that he believes that VF Corporation has iconic brands in attractive growth categories, while also having significant competitive advantages. His goal as interim CEO is to drive profitable growth across the portfolio while the board identifies the next leader. I believe Benno Dorer has the experience to steer VF Corporation in the right direction while they identify their next leader. Nonetheless, the uncertainty about who is going to be the next leader of VF Corporation is something to keep in mind, if investing in the company.
I believe that VF Corporation has brand moat. We do have a lot of uncertainty regarding the management though. Now let us investigate the numbers to see if VF Corporation does live up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all years. VF Corporation has delivered an acceptable ROIC historically, the numbers look especially good up to the spin off in 2018. Like most other companies, VF Corporation has been affected by lockdowns during the pandemic, and the numbers in fiscal 2020 and 2021 are underwhelming. However, it is nice to see that they managed to deliver a ROIC above the required 10 % in fiscal 2022.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The numbers are a bit up and down over the ten-year period. And we naturally see a big dip in 2018 due to the spin off and during the pandemic in 2020 and 2021. It is nice to see that VF Corporation managed to grow their equity once again in 2022, and it is a trend that I would like to see continue.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. First it is worth noting that we have no numbers from 2018 due to the spinoff. VF Corporation has delivered a positive free cash flow every year the last 10 years, but it has been very inconsistent, which is quite natural, as the company has acquired or sold off brands through its history. Some examples are that they acquired Supreme in 2020, while they sold off some brands in their work segment in 2021. Hence, it is more interesting to look at the leveraged free cash flow margin, which leaves a lot to desire in 2022. Personally, I would like to see a much higher leveraged free cash flow margin moving forward.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculations on VF Corporation, it shows that debt can be paid off in 3,31 years. Thus, it is a bit larger than I would like but in no way alarming. I would like to see debt go below 3 years next year though.
Like with all other companies, there are some risks you need to consider, if you are going to invest in VF Corporation. Economic downswing. As I write this there is a fear of longer recession. The performance of VF Corporation is subject to global economic conditions. VF Corporation's revenue and profits depend on the level of consumer spending, which is sensitive to global economic conditions. Hence, if global economic conditions decline, it will affect the customers of VF Corporation that will spend less money on their products. Right now, we see increased fuel and energy costs, higher interest rates and lower home values, which all affects consumer spending. Competition. VF Corporation operates in a highly competitive market as both the footwear and apparel industries are highly competitive. It means that VF Corporation will need to continue to meet the demands of consumer preferences and product trends, while being able to respond to constantly changing markets. VF Corporation mentions in their annual that some of their competitors are larger and have more resources, meaning that VF Corporation needs to stay on top of their game not to lose market shares. Margins are decreasing. In the last quarterly earnings, VF Corporation reported some disappointing margins. Gross profit margin was down 240 basis points, while operating margin was down 440 basis points. Not only that, but management also guided with an operating margin of 11 % in fiscal 2023, which is the lowest COVID years, in the last decade. Freight prices, higher inventory and a strong dollar are some of the reasons for the decline in margins, and it is hard to predict how long these obstacles will last.
It isn't all risks, there are also potential for VF Corporation moving forward and VF Corporation has some strategic areas that should result in long-term growth for the company. Optimizing their portfolio. In the past five years, VF Corporation has gone from 32 brands to 13 brands. These brands have been chosen because they are anchored in segments with meaningful consumer tailwinds. With fewer brands in the portfolio, VF Corporation believes that they can leverage brand-building and operational strengths to generate synergies and operating efficiencies. If management succeed in doing so, tit should make VF Corporation more profitable moving forward. Investing in Asia. Only 14 % of their revenue is in Asia. Hence, VF Corporation has plenty of room to grow in that area. VF Corporation mentions that they see long-term growth opportunities in the region, and the company wants to strengthen their emerging channels, elevate store formats, and optimize their omnichannel integration to best serve their customers there. Furthermore, China has just switched their COVID policy, which should be another catalyst for VF Corporation as it will increase consumer spending. Elevating direct channels. Direct to consumers sale have higher margins than sales through wholesale. VF Corporation is committed to increase the direct to consumers business, and has done a quite good job so far, as their direct to consumers business grew by 31 % in fiscal 2022. Management mentioned that they expect their direct to consumers business will continue to gain share in revenue mix moving forward.
All right, we have gone through the numbers, potential and risks regarding VF Corporation, and now it is time for us to calculate a price for VF Corporation. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 2,40 (management guided with a 2,40 to 2,50 EPS in fiscal 2023). I chose an Estimated future EPS growth rate of 8 (long-term management has guided with a high single digit to low double-digit EPS growth), Estimated future PE 16 (which the double of the growth rate, as the historically PE for VF Corporation has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $20,49, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy VF Corporation at price of $10,25 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 121. The Capital Expenditures was 279. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 195 in our further calculations. The Tax Provision was 192. We have 388,967 outstanding shares. Hence, the calculation will be like this: (121 - 195 + 192) / 388,967 x 10 = 3,03 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 1,59 and a growth rate of 8 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $18,27.
VF Corporation is an interesting company that has been in business in 123 years. It has recently reached the status as a dividend king, as they have raised their dividend in 50 consecutive years and is currently paying a high dividend yield of more than 7 %. Hence, the company looks interesting for dividend investors. However, there are also some things to consider before investing in VF Corporation. There are some short-term macroeconomic headwinds that will affect the results of VF Corporation. Furthermore, there are uncertainty regarding management. Their guidance for fiscal 2023 is also very poor, and especially the expected decrease in margins is a tough one. Personally, I would never invest in a company without knowing what the next management will be, but if you are a dividend investor, and if you believe that these problems are short-term, I can understand why you would invest in a dividend king that pays a 7 % dividend yield. Nonetheless, I will not invest in VF Corporation now, as there is too much uncertainty.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.
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