Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to outdoor, sports, and active wear apparel and accessories producer V.F. Corp. (VFC 0.54%). I'll show you why this high-flying stock could become a valuable income and share appreciation driver for long-term investors.
Source: Natalie Lucier, Flickr.
Retail investors, take notice
However, before we get into why V.F. Corp should be on income investors' radars, let's first have a look at some of the challenges V.F. Corp. could face over the coming years, since we all know that no company is perfect.
The biggest challenge retail developers will face is the changing buying habits of consumers. Consumer spending habits, just like the economy, are naturally cyclical and tend to ebb and flow every couple of years. This means if apparel and accessories companies are unable to expand into emerging market economies that can grow independently of larger economies, their growth patterns will tend to be tied intricately with the U.S. economy. It certainly makes the sector somewhat predictable, but makes holding for the long term a bit unpleasant for shareholders.
Another concern is that competition in the outdoor and activewear space is only increasing. Investors often think of Nike (NKE 1.06%) in terms of shoes, and lululemon athletica (LULU 0.30%) as a yoga-centric apparel producer. While true, these apparel and accessories producers are beginning to expand into new lines that could draw them into more direct competition with V.F. Corp. This isn't to say V.F. won't be up for the challenge. But I'd be negligent if I didn't point out that Nike and lululemon have forged an emotional attachment with their consumers, and that their brand power could give V.F. a viable run for its money (so much so that V.F. has been rumored as a possible buyer of lululemon).
Lastly, aside from being a cyclical sector, consumer fashion trends are constantly changing, and there's no guarantee V.F. Corp. will always hit the nail on the head in terms of what consumers want. The company's ability to respond to these changes presents both an opportunity and a risk for V.F. and its shareholders.
The V.F. advantage
But, V.F. has quite a few tricks up its sleeve that give it comparative advantages within the outdoor apparel segment and make it a potentially appealing buy for income-seeking investors.
The primary factor working in V.F.'s favor is its product line breadth. V.F. hasn't had any problem delivering organic growth from its key brands, but it's also made a name for itself in recent years by going out and acquiring top-shelf brands to increase the attachment between its brands and consumers.
Source: IvanWalsh.com, Flickr.
For example, V.F. acquired footwear giant Timberland for $2 billion in June 2011 in a transaction that was immediately accretive to V.F's bottom line. The purchase allowed one of the most recognized work and outdoor footwear companies to join brand names such as Lee jeans and North Face under the V.F. umbrella. But, what's unique about V.F.'s acquisitions is that it allows the brands to maintain the individual identities that make them great. In other words, V.F. doesn't try to impose what works for other brands on the brands it purchases, and this is a key point that acquiring retailers often screw up.
Another key to V.F.'s success is that it's set measurable goals of success that it and its management team can be accountable for. Released last year, V.F. announced a five-year plan to push revenue to $17.3 billion and EPS to $18.00 (split-adjusted $4.50) by 2017 using a combination of organic growth, acquisitions, share repurchases, and dividend growth. All told, this would represent 10% compound annual revenue growth and 13% compound bottom-line growth through 2017. Also noted in its plan are improved efficiencies meant to boost its gross margin by 300 basis points to 49.5% from the 46.5% it reported in 2012. The centerpiece of its projected growth will be its North Face, Vans, and Timberland brands, which are expected to grow sales by 74%, 93%, and 53%, respectively, through 2017.
Source: Pierre Reveille, Flickr.
In addition to allowing its brands to develop and build their own identity, it's also pushing them into new realms that could aid their growth. Vans, a footwear company often targeting teens and young adults, announced the addition of athletic shoes two years ago meant to directly rival giants like Nike. Because V.F. has so many brands under its belt, it has the luxury of being able to experiment and fail many times over in order to find that one new home-run idea.
Show me the money!
But, let's get to what we're really here for: V.F.'s incredible dividend growth.
Since 2006, V.F.'s shareholders have witnessed its free cash flow more than triple from $355 million to roughly $1.2 billion over the trailing-12-month period. Free cash is the basis with which companies determine how much of a dividend they can afford to pay out to shareholders. With somewhat steady growth in free cash flow, it's not surprising to discover that V.F. has been able to boost its annual dividend in -- get this -- 41 consecutive years! It might be one of the stealthiest Dividend Aristocrats around, because you hardly ever hear its name discussed among income investors.
Graph by author. Data source: Nasdaq.com. 2014 figures assume $0.2625/quarter payout for remainder of the year.
As you can see, V.F. has grown its dividend by a cool 304% over the trailing decade for a compound annual growth rate of 15%. Some investors might look at its current 1.7% yield and be somewhat disappointed. However, you should keep in mind that V.F.'s share price has quadrupled over the past five years, so its reduced yield is merely a factor of its increased share price and not some plot by management to not reward shareholders. There are few companies I've seen that do as good of a job rewarding investors and their community as V.F.
This is a company income investors should deservedly give a closer look.
