Problems can create opportunities. Problems lead to a lower share price and higher dividend yield. The problem for investors, though, is to know which problems are worth buying. Are the problems terminal or temporary?
Investors often confuse the former with the latter and vice versa: The terminal is bought and the temporary is sold. Fortunately, a little self-awareness, some quiet contemplation, and an ability to see beyond the present is all it takes to differentiate the terminal from temporary in these dividend growers.
Dividend Growers: Problem Child 1
VF Corp. (NYSE: VFC), maker of Lee and Wrangler jeans, Vans, The North Face, and Timberland, has proven it can create future wealth for income investors. VF has 44 years of dividend growth to its name. The latest dose of dividend growth produced a 13.5% increase. VF shares yield 3.3% as I write.
That said, VF’s shares are down 19% over the past year; they’re down 30% from their all-time high in 2015. Yes, VF has problems, but the problems are hardly terminal.
Near-term growth is the most pressing problem. Revenue grew 2% in 2016 compared with previous guidance for 3% to 4% growth. EPS came in a few cents shy of earlier guidance of $3.20. This, to belabor the obvious, is a problem.
But the growth problem can be overcome in short order. It has in the past; I expect that it will in the future.
VF is remedying the problem. It continues to expand its brands into world markets. Foreign and emerging markets generate mid-to-high-single-digit growth. VF expects its international business to grow to 43% of total revenue by 2017 (versus 36% in 2015).
The internet is another growth avenue yet to be fully traveled. Indeed, e-commerce is VF Corp.’s fastest-growing direct-to-consumer channel. North Face, Timberland, and Vans reported 30% year-over-year increases in e-commerce sales this year.
Problems lead to a lower price and lower valuation multiples. The good news is that VF Corp. shares now trade at less than 16 times 2017 EPS estimates of $3.30. The five-year average is close to 20, which it deserves. We’re talking 30% upside potential for a true dividend aristocrat with a few temporary problems.
Dividend Growers: Problem Child 2
Is it a lovers’ spat, just a spat, or a prelude to a bitter divorce? Uncertainty to the answer is the problem Qualcomm (NASDAQ: QCOM) investors face. I refer to the recent $1 billion lawsuit Apple (NASDAQ: AAPL) filed against Qualcomm, Apple’s primary chip supplier for its iPhone line of smartphones.
Immediately following the lawsuit announcement, Qualcomm shares lost 17% of their value. The lower share price pushed up the dividend yield to 4%. This is a yield for a dividend that has grown at a 24% average annual rate over the past 14 years.
When investors get wind of a big-number lawsuit, they focus on the big number, as if it is etched in stone and will prevail in the final outcome. It rarely works that way. In time, cooler (more rational) heads prevail.
The fact is that Qualcomm remains Apple’s best alternative for smartphone chips. Apple knows this. If it were otherwise, Apple would pursue other alternatives. In Qualcomm’s conference call to discuss its quarterly earnings, CEO Steve Mollenkopf said that there is “no better long-term partner for Apple than Qualcomm.” Mollenkopf also reassured analysts that Qualcomm intends to remain a supplier to Apple.
Apple and Samsung are Qualcomm’s two largest customers. Concentration risk is a consideration. That said, both smartphone giants have no immediate chip alternative to match Qualcomm’s quality and performance. (In spite having a new processor of its own, Samsung still chose Qualcomm’s Snapdragon processor for its latest mid-range Android handsets, the Galaxy C5 and C7. Samsung is the world’s top seller of smartphones.)
As for Qualcomm, it continues to innovate and expand.
In November, Qualcomm acquired NXP Semiconductors (NASDAQ: NXPI) in a deal valued at $47 billion. NXP is one of the world’s largest developers of chips for automobiles. Qualcomm is betting big on cars becoming the next smartphone – a device that rolls together communications and services once handled by several other devices.
Apple asserts that Qualcomm has charged unfair royalty rates and that Qualcomm has abused its dominating position in smartphone chip technology. The lawsuit is more about Apple wanting to renegotiate lower royalty rates than anything. The lawsuit will be resolved to the satisfaction of both parties in short order. The problem will go away. But by then, Qualcomm’s low share price will have also gone away.