The more a term is used, the more its worth diminishes.
The term “dividend aristocrat” comes to mind. I see it bandied about too often. A company has a few years of dividend growth to its name, or declares one or two exceptionally large dividend increases, and you can be sure that some scribe somewhere will invoke the term “dividend aristocrat” to embellish his investment thesis.
Authentic dividend aristocrats are few and far in between. Decades of annual dividend growth are a must, as are meaningful annual dividend increases. A percentage point or two of annual growth doesn’t cut it.
When I find an authentic dividend aristocrat, I’m keen to recommend it. I’m keen to recommend VF Corp. (NYSE: VFC), the world’s largest apparel company with $12.4 billion in annual revenue. The name VF Corp. may fail to ring a bell, but its brands should: Lee, Wrangler, Timberland, The North Face, JanSport, Nautica, and Vans all reside in the portfolio.
VF Corp. Dividend: Aristocratic
VF Corp. is an authentic dividend aristocrat. The company has been around since 1899. For the past 44 years, annual dividend growth has been the norm. The latest bit of growth for the VF Corp. dividend occurred last month with the latest quarterly payment, a 13.5% increase that lifted the yield to over 3%.
If you can hang around for 118 years, you’re likely a malleable business willing to embrace the present. Though over a century old, VF Corp. is hardly sclerotic. It continually moves. Since 2004, VF Corp. has moved the business to include more lifestyle brands through organic growth, selective divestitures, and selective acquisitions.
VF Corp. has also expanded its brands into world markets. Developed and emerging markets generate mid-to-high-single-digit growth. VF Corp. expects its international business to grow to 43% of total revenues by 2017 (versus 36% in 2015).
The internet is another growth avenue yet to be fully traveled. 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 last year.
And now we come to the magic bestowed upon dividend aristocrats. As any seasoned dividend investor knows, with dividend growth comes share-price growth.
VF Corp.’s share price averaged $17 in 2006. Today, the shares trade around $52. VF Corp.’s share price has more than tripled over the past 10 years. 2006 investors who still own their shares today have seen their initial investment not only triple, they’ve seen their yield grow to 9% on their initial investment.
With that said, near-term price performance has failed to match the long-term trend. VF Corp. shares are down 10% in the past 12 months. Growth, or rather the lack of growth, is the issue.
VF Corp. expects revenue to grow 2% for 2016 compared with previous guidance for 3%-to-4%. It also expects EPS to post at $3.13, down from earlier guidance of $3.20. This, to belabor the obvious, is a disappointment, but it’s not a new disappointment. Growth has ebbed only to flow again in the past.
Yes, there are headwinds to be overcome. In the meantime, VF Corp. continues to pump out gobs of free cash flow (cash left after the bills are paid). For the past 12 months, it generated $1.2 billion in free cash flow, up from $992 million in 2012.
VF Corp. Dividend Increases and Share Buybacks
With that cash, the company continually increases the VF Corp. dividend and continually buys back shares. One billion dollars was spent buying back shares through the first nine months of 2016. At the end of 2016, VF Corp. will have returned more than $5.5 billion of cash via share buybacks and dividends over the past five years.
Bad news leads to lower prices and lower valuation multiples. The good news is VF Corp. shares now trade at less than 17 times 2016 EPS estimates of $3.13. The five-year average is close to 20, which it deserves. Next year, VF Corp. should earn $3.40 to $3.45 per share.
VF Corp.’s growth will ebb and flow, and history has proven that when growth ebbs, as it currently does, investors are offered the opportunity to pick up an authentic dividend aristocrat at a favorable multiple to projected earnings.