Apparel companies have endured a challenging couple of years, with "the death of retail" narrative, the COVID-19 pandemic, and the current inflationary environment all combining to throw some serious wrenches into their plans. But this gauntlet of challenges has created the opportunity to buy some of the cheapest stocks in the market, trading at rock-bottom price-to-earnings multiples and sporting high dividend yields.
Here are three stocks in the apparel space that all have dividend yields of 4% or more.
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1. Hanesbrands
I'll be brutally honest here -- Hanesbrands (HBI +0.00%) is not a particularly exciting company; about 60% of its business is selling innerwear, which includes items like underwear, undershirts, and socks. While this is admittedly a fairly mundane end market, the company's dividend yield of over 5% is interesting. While Hanesbrands has been a consistent dividend payer since at least 2013, one factor that must be noted is that the dividend payout itself hasn't changed since 2017 and the yield is currently north of 5% because the stock price has declined. On the positive side, Hanesbrands maintained its dividend payout throughout the COVID pandemic during 2020 and 2021, at a time when many companies suspended or cut their dividend payments.
Hanesbrands is a defensive play that is relatively well suited to deal with the current economic challenges; at a time when prognosticators warn that discretionary spending is falling, things like socks and underwear are essentials that consumers still need to buy. Furthermore, the stock trades at a modest price-to-earnings multiple of 8 and an even more attractive forward earnings multiple of just 6.4.
NYSE: HBI
Key Data Points
Hanesbrands also has more going on under the hood than some observers realize -- it owns the popular Champion brand, which has enjoyed a renaissance with younger consumers, in part because its products are reasonably priced. Management targets $3.2 billion in annual sales for Champion by 2024, up from $2 billion in 2021.
An investor starting a position in Hanesbrands would be expecting to generate returns through a combination of the stock's dividend yield of over 5% and the stock price appreciating as the market gives Hanesbrands more credit for the growth of Champion and reevaluates its low valuation.
2. VF Corp.
Some investors may not be familiar with the name VF Corp. (VFC +2.36%), but almost all will know some of the brands under its umbrella, which includes household names like Vans, Timberland, and The North Face. VF Corp. isn't as cheap as the other companies on this list from a valuation perspective, but after a 44% drop from its 52-week high, VF stock is trading at 15 times earnings and just under 13 times next year's earnings, which is inexpensive compared to the market as a whole. Furthermore, it pays out a generous dividend that currently yields 4.3%. While VF isn't usually mentioned in the same breath as some of the quintessential dividend stocks, perhaps it should be, as the company is a Dividend Aristocrat, meaning it has raised this dividend payout annually for at least 25 years (49 years in this case).
Key Data Points
Vans, Timberland, and The North Face combine to make up about 60% of VF's sales. Vans has a lot of potential as it continues to evolve from an action sports brand into a global fashion and lifestyle brand with appeal across markets. For example, while Vans was originally popular with young men, the company says that 60% of the brand's customers are now women. The brand also enjoys a strong standing with younger consumers. The evolution seems to be in fruition as Vans was a $350 million brand when VF acquired it in 2004 and is pushing toward management's forecast of $4 billion in sales for 2022. This target means that there is still plenty of runway for growth inside of what Euromonitor calls the $152 billion global market for sports-inspired apparel and footwear.
3. American Eagle
Last but not least, we have American Eagle Outfitters (AEO +2.23%), which has the highest dividend yield of the group of 5.4% at current prices. Like Hanesbrands, it must be noted that American Eagle's dividend yield is this high because the price of the stock has declined. Another negative to be aware of is that while American Eagle has traditionally been a dividend payer, it did briefly suspend its dividend in 2020 during the worst of the COVID-19 pandemic. However, the company later paid out a deferred dividend in December 2020 when management felt it was in a better position to do so. American Eagle resumed paying regular dividends and then increased its quarterly dividend from $0.138 to $0.18 per share.
Shares of American Eagle are decidedly cheap, no matter which way you slice it. Shares change hands at just 7 times earnings and 5.6 times next year's earnings, and at a price-to-sales ratio of just 0.5 -- meaning the entire company is valued at less than half of the revenue it will generate this year.
NYSE: AEO
Key Data Points
The market is valuing American Eagle like it is falling out of style, but this is not the case. The company is growing earnings and revenue, and its brand still resonates. American Eagle is popular with teens and young adults, ranking as the No. 1 jeans brand for consumers aged 15 to 25 based on research by the NPD Group and clocking in as the No. 2 fashion brand with females and No. 3 for males, according to Piper Sandler. Like HanesBrands with Champion, American Eagle is another company that is home to a brand that is growing fast -- Aerie is the crown jewel here, growing 27% year over year as of the most recent quarter and posting an increase in revenue growth for 29 consecutive quarters.
An investor buying shares of American Eagle should consider the dividend payout combined with the inexpensive valuation and the possibility of share price appreciation as the market recognizes the value of the Aerie brand and the company's popularity with young adults.
Looking ahead
The current macroeconomic challenges and volatile market have created the opportunity to buy these solid apparel brands at favorable valuations, and with attractive dividend yields of 4% or more to hold investors over while they wait for the market conditions to improve.
